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Infrastructure projects offer route into Africa

Although increasing levels of corruption and violence may prove unpalatable, South African infrastructure projects are tempting, writes Gavin Hinks

WHEN SCORES OF MINERS were killed during strike action in South Africa last year, you would have been forgiven for thinking the country was not a place to do business.

During clashes with police at the Lonmin-owned Marikana platinum mines, 46 people were killed in violence which conjured up the bad old days of South Africa. Pictures beamed across the world left viewers in no doubt that something had gone seriously wrong and many asked whether the country was on the right path. The economy has taken a knock; critics ask whether South Africa is falling behind the growth of its neighbours and business confidence is not what it once was.

Despite the demoralising nature of the violence, there remain opportunities in the country and a huge appetite for imported goods. South Africa may be struggling in some quarters but it is certainly far from being a country to discount as a potential destination for UK goods and services.

The dichotomy is summed up by Dr Jonathan Lawley, a consultant at the Business Council for Africa: “South Africa has an increasing problem with corruption but on the other hand it is by far the most developed country in the whole of Africa.”

Talk the talk
The UK has a history of trading with South Africa and accounts for 40% of its foreign direct investment. Time zone proximity and language make business relatively easy between the nations. “South Africa is an environment that people can quickly come to terms with,” says Andy Burch, UK deputy trade commissioner in Johannesburg.

However, the country does have its detractors, as a market and political economy. Many are disappointed at its progress since the end of apartheid in 1994. And others have argued there is good reason for sounding a sceptical note about the country’s prospects. A spate of recent events give cause for concern. The Marikana killings is one. But in September last year ratings agency Moody’s revealed its worries by downgrading the state’s sovereign debt, blaming pessimism about the standard of government and declining socio-economic conditions. South Africa has also suffered because – among African nations – it has the greatest contact with the developed, leaving it more exposed to the ravages of the financial crisis.

Among the social concerns, though, is unemployment. The most recent figures reveal the jobless rate is 6% among whites and 29% among black citizens. But that’s not the worst. Youth unemployment stands at a punishing 50%. Ironically, while the unemployment rate is scary, the country has trouble filling skilled roles such as nursing.

Inflation is not helping. Central bank governor Gill Marcus expects it to average 5.9% in 2013, up on previous forecasts.

If there is one headline statistic that attracts attention, it is the country’s economic growth prospects. Gross domestic product is expected to reach 2% this year, down from 2.5% in 2012, still a positive number but tailing off and behind neighbours like Kenya, a country attracting much attention, not just for colourful politics but for clocking up 4.4%, 5.8% and 5.1% growth over the past three years. However, it is Nigeria that really casts a shadow, registering growth last year of 7% and prompting speculation its economy will be bigger than South Africa within a decade.

But there is reason to think that exporting to South Africa will continue working.

Imports to the country have been on a rising trend. They slumped dramatically after 2008 but continued rising soon after and reached a peak in 2012. January 2013 saw imports climb to a value of ZAR7.7bn (£5.6bn). The country hasn’t seen a trade surplus since the end of 2011, while a yawning trade deficit seems to have been growing steadily indicating a substantial appetite for overseas goods and services.

New growth
One of the reasons for that may be the huge funds being poured into government projects. The South African government has been criticised for failing to improve infrastructure during the 19 years since the start of ANC rule. But the Jacob Zuma regime has tried to answer those critics with the launch in 2010 of the New Growth Path, a vast project to invest billions of rand in creating five million jobs by 2020. This means vast public sector projects – critical for South Africans concerned about unemployment and the provision of public services, but also for UK exporters interested to see what South Africa will be buying over the next decade. The investment targets major works in water, energy, rail, roads and health care.

A government statement says: “The new growth path sees the infrastructure programme as a trigger to build a local supplier industry for the manufacture of the components for the build programme.”

On the face of it, the statement makes the plan look as if it is only about local business. But experts on the ground say the project is open to foreign companies. According to Dionne Kerr, chief executive of Siyakha, Durban-based consultants specialising in helping exporters to South Africa, what the country wants is assurance that exporters are not in the game of making a profit and then turning tail. “South Africa has some resistance to any foreign-owned companies that feel they wish to benefit from South Africa, without [South Africa] realising any benefit from them operating,” she says.

The bedrock for ensuring the country shares in the profits is the Black Empowerment Legislation, which attempts to ensure that black and local businesses are boosted by trade. One of the most basic effects of the law is ownership – ensuring a proportion of any company seeking a government contract is under the control of black business people (Indian, African or coloured, under South African law).

Dionne Kerr warns that all companies hoping to trade with South Africa need to know where the legislation may apply, especially if their hope is to tap into the infrastructure developments that could make them either direct or indirect government suppliers.

The ownership demands would mostly apply to newly created South African entities but the legislation can work in other ways such as reserving a proportion of management control for target races and genders, or setting a minimum level of black people and women across all levels of a company in what is known as the employment equity measure. The legislation also lays down rules for the development of skills among black people or procuring goods and services from black suppliers. But this need not be overly onerous. Some companies deal with the rule by resisting the urge to ship finished products and instead having them assembled in South Africa, using a component that is locally produced.

Kerr warns ambitious companies “must commit” to three things when doing business in South Africa: localisation (registering in South Africa and paying taxes there), job creation directly or indirectly and, lastly, capacity building or developing local skills and allowing access to industry knowledge.

“I think South Africa has responded to the economic crisis like many other countries and has prioritised the procurement of goods and services from companies that are based in South Africa, employing South Africans and contributing to the economy. This makes strong political and economic sense. However, for people who wish to export their product, this may be challenging,” says Kerr.

Navigating this legislation can be daunting for FDs with no previous experience in South Africa. Yet there is a role locals can play in this, in addition to finding potential customers, partners or agents/distributors. UK Trade & Investment suggests involving a local consultancy or PR firm to recruit an appropriate audience for technical seminars or product introduction meetings to attract customers. The same is true for steering a course through the relevant legislation.

According to Kerr, the issue is finding someone “competent” to be your Black Empowerment owners (the people who will own a corporate entity in partnership with you, the foreign company). The number of competent people is “limited”, according to the experts, though the number increases with each year the legislation is in place.

“Every year it is in place we will improve,” explains Kerr.

One of South Africa’s other claims is being the springboard into the rest of the sub-Saharan continent. But, as Andy Burch points out, the growth in countries like Kenya and Nigeria is a challenge too. Growing more quickly, they present dynamic economies to the would-be exporter. Other countries also have less onerous regulation, making them an attraction. South Africa’s highly developed regulatory system has its detractors but others urge exports to see positively. Dionne Kerr says: “Once you understand it, it is a risk management mechanism.”

One thing the country cannot escape, like many other on the continent, is the taint of corruption. Data from Transparency International reveals one in ten South Africans believe customs is an area where “bribes are demanded”. The Business Anti Corruption Portal insists trading with the country is not as “bureaucratically cumbersome” as other countries in the region but other surveys suggest business finds customs procedures long and tedious. Since the 1994 Uruguay trade round, South Africa has been committed to streamlining its import process and getting trade tariffs down.

Goods vulnerable to graft may be those that develop faster than the country’s customs coding procedures. With 90,000 product codes and 40 tariffs, the system is regarded as cumbersome by many, but when it fails to categorise a product, it creates ambiguity which can be exploited by corrupt officials prepared to block clearance from the docks. However, Walter White, a partner at specialist law firm McGuireWoods, sounds a note of optimism.

“South African has been consistently trying to simplify its import regulations and become much more of a global trading centre and continental trading partner. Because of its geographical position, it is a major port for the continent as a whole,” he says.

Map outline of South AfricaKey facts: South Africa
Poulation: 50.6 million
GDP: $408.2bn (£266.3bn)
Primary imports: Fuel, motor vehicles, electronics, pharmaceuticals, food and scientific instruments
Getting paid: If you are a first-time exporter to South Africa, the standard method of receiving payment for your goods is by confirmed documentary letter of credit. At an early stage during negotiations with your importer, discuss with your bank the terms and arrangements for security of payment
Pricing: South African companies accept pricing in sterling or rands. In recent years, the rand has been unstable so customers may be interested in exploring other currency options
Bribery and corruption: The unfortunate perception of South Africa in recent years has been that bribery and corruption are the norm
Intellectual property rights: The South African government passed two IPR-related bills in parliament at the end of 1997, thereby enhancing its IPR protection
Legal environment: The legal system is similar to the UK’s

Source: World Bank, Trading Economics, UK Trade & Investment

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