BEE chasing companies away from South Africa

South Africa’s Black Economic Empowerment (BEE) framework creates a significant hurdle for companies to invest in South Africa, resulting in them looking for alternatives to the country. 

This is particularly true for international companies that have a wide set of options available to them when investing in a new manufacturing plant, service offering, or expanding existing operations. 

South Africa fundamentally competes with other countries in attracting investment and capital, which drives economic growth and employment. 

BEE, which as a policy framework is unique to South Africa, makes the country less attractive to international investors by effectively taxing capital on arrival. 

It also significantly increases the compliance burden of companies operating in the country, making it uncompetitive with its peers. 

This results in hundreds of companies preferring to take their investments elsewhere, often to other emerging markets, the head of Solidarity’s Research Institute, Connie Mulder, said. 

Mulder explained that much discussion centres around the cost of compliance for existing South African companies, without much analysis about missed opportunities. 

Starlink has been the most public example of a company refusing to invest in South Africa because of its BEE requirements, but there are many others who simply avoid the country. 

“At the moment, if a multinational company wants to come into South Africa, they have an immense regulatory burden they have to comply with,” Mulder told BizNews. 

“Starlink is loud about their BEE compliance. But, for every Starlink, there are 100 companies that simply pass us by.” 

These companies go to Morocco, Egypt, or Mauritius, for example, to avoid dealing with South Africa’s regulatory burden. 

“The companies say, ‘ Look, your regulatory burden is way too complex. We are not going to invest,’” Mulder said. 

“It is not just us as Solidarity saying this. The World Bank has said South Africa’s regulatory burden has become too burdensome for companies and is retarding growth.” 

Mulder said it is common sense that companies would rather invest in jurisdictions where the regulatory burden is lighter, as capital flows along the path of least resistance. 

Alternatives are already here

The BEE framework, as it currently stands, is effectively a tax on capital arriving in South Africa, with companies forced to give up a financial stake in order to operate in the country.

The removal of this tax is one of the easiest things South Africa can do to make it easier to invest in the local economy. 

This will translate into more investment and faster economic growth, which will create more jobs and potentially a positive feedback loop. 

“You should not even tax capital as it leaves your economy. We tax capital as it comes in through the door,” political analyst Frans Cronje said. 

“If you wish to have the privilege of investing in our economy, you have to give up around 30% to a specific set of shareholders. This leaves very little left in terms of return for investors.”

Relative to what is on offer in the rest of the world, this makes South Africa significantly less attractive as an investment destination. 

“It is this reason, as much as anything, that explains why the fixed investment rate is sitting at half of the emerging market average,” Cronje said.

Mulder explained that South Africa already has alternatives to this in the form of equity equivalence programmes, which exist in BEE legislation. 

Multinationals need to apply to be granted access to Equity Equivalence Investment Programmes (EEIPs) as it stands. 

“From our perspective, it is a silly thing to do. There is no reason for multinationals to apply to have to avoid giving up equity to operate in South Africa,” Mulder said. 

“We are saying the government should flip that around. Instead of making the government decide who can use EEIPs or not, it should be the default.”

If a multinational wants to invest in South Africa, it can use EEIPs to meet existing requirements without asking for permission. 

Mulder said that then the government will have to argue why a given company should be forced to comply with BEE in other ways. 

These EEIPs should also be changed to focus on creating jobs, uplifting people from poorer communities, and upskilling individuals. 

“This should reduce the friction for a foreign investor who wants to build a factory in South Africa or invest in the country,” Mulder said.