Foreign Direct Investment: Dividends and Protection for Whom?

By Saliem Fakir · 3 Aug 2011

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The debate on foreign direct investment (FDI) follows the same superficial rhetoric that gathers around the debate on nationalisation.

This issue has gathered somewhat of a storm following Walmart’s acquisition of Massmart. The South African government has appealed the Competition Tribunal’s decision to grant the merger on what it perceives to be a deal on the cheap.

It wants a more expansive commitment from Walmart so that the merger leads to deep roots rather than shallow ones.

It is true that we have not thoroughly made up our minds on the Walmart case and this is frustrating for the parties involved. But at least there is a growing realisation that the Walmart case is making us think about the bigger picture.

That the South African government should do so is no different to the routine practises of other countries.

Countries vary in the way they deal with FDI. Not always is the welcome enthusiastic or even cordial.

Take, for example, the knee-jerk reaction of the US congress to the China National Offshore Oil Company’s (CNOOC) $18.5 billion bid for US oil company, Unocal, in 2005. The debate was hardly sane. The deal was blocked purely on nationalistic grounds.

The same was true for the Dubai Ports World (DP-World) attempt to acquire control over US ports through an international merger and acquisition arrangement in 2006. It was first approved and later reversed by the US government after a political storm and fit of anti-Arab xenophobia that flared amongst Republicans.

This was a vast contrast to the more considered and rational approach of the Canadian government regarding the sale of a strategic asset – that of the Saskatchewan PotashCorp - which controlled 20% of the world’s supply of potash.

Both the Chinese government and BHP Billiton made a bid for PotashCorp, but the Canadian government decided against it after extensive due diligence and review. The bid process made the Canadian government realise that it was selling off a vital asset that was strategic to the world, so it changed its mind.

The picture for green-field investment projects is somewhat different.

Countries that do concern themselves with developing new sectors, diversifying existing ones or expanding the scope of their value, ask for more than just “the price.”

Green-fields are often preferred above mergers and acquisitions, as governments and the public in general see them as real things that will have deep roots and remain in the country for the long haul. 

However, the invitation to foreign investors is always conditional.

France recently released bid requests for 3GW of offshore wind power. France set very clear localisation standards as part of its bid request. The French government has set three clear criteria by which the bids will be judged: the cost of electricity, an industrial component and local and environmental impacts.

In terms of the scoring of the bids, the cost of electricity will be weighted at 40% in addition to the level of effort companies are able to put into local ‘component’ development.

There is nothing offensive in what France is asking for. Its conditions are similar to the Canadian state of Ontario, which invited bids last year for solar and wind projects.

In the same way, Brazil linked preferential rates for soft-loans to localisation thresholds that companies were willing to achieve for their wind projects. The higher the bid winner can meet local requirements, the better the interest rate from its development bank, the BNDES. 

As these cases illustrate, entry into a national market is never a blank cheque. National interests do matter. The capacity to engage these depends on the relative asymmetry between the state and global conglomerates who scour the earth for the next big opportunity and deal.

FDI is not a Godsend. If it is not well managed and properly framed, it may not provide the benefits foreign investors promise when they secure entry and claim prized deals.

In the absence of good policy and state capacity to manage these flows, dividends are for the conglomerates’ taking and the regime of protection offered to their profits can lead a naïve or weak state towards favouring windfall profits for the conglomerates at the expense of local development.

Thus far South Africa has not had a policy framework that seeks to align the need for FDI with national development needs in a manner that can be considered developmental.

We must also be mindful of the fact that South Africa has not been a great attracter of FDI as of late.

We have largely benefited from short-term capital flows, primarily in the stock market, and then some long-term plays in the financial and services sectors through mergers and acquisitions. The most prominent being the Industrial and Commercial Bank of China’s 20% stake in Standard Bank and Barclays purchase of ABSA.

The United Nations Conference on Trade and Development (UNCTAD) noted that FDI flows to South Africa dropped by 70% in 2010. It was a paltry sum of $1.6 billion from a high of $5.4 billion in 2009. Net inflows of FDI for South Africa between 2005-2009 have been around 2% of GDP, but countries with a similar profile (as upper middle income economies) have averaged flows of 3% of GDP or higher.

This lack of flows may create a climate of desperation for FDI but it may also be the right time to pause and take stock as we can still offer lots of opportunity for investment.

In this regard, efforts have been underway to change things since the beginning of the year. The Treasury has released a discussion document titled: “A Review Framework for Cross-Border Direct Investment in South Africa.”

The document recognises that South Africa needs a more transparent framework for reviewing FDI so that public interest issues are properly accounted for.

The document admits that the way FDI is being dealt with at present is opaque and that state co-ordination has largely been reduced to the application of exchange control rules and the Competitions Act as default.

The new framework aims to set clear criteria for how investments would be assessed as well as expand the involvement of government departments and agencies rather than limit decisions over FDI flows to the department of finance and the South African Reserve Bank.

There are two approaches the framework proposes: 1) a sectoral approach where foreign investment is either open or restricted in certain sectors. Brazil, for instance, prohibits foreign investment in certain sectors like nuclear energy, aerospace, health services, postal and security services; and 2) a screening process that sets a cap on the amount that can be invested or simply bars entry of foreign investment in certain sectors.

Australia uses a screening approach. Foreign bids for Australian assets above a certain threshold are subject to review by the Foreign Investment Review Board, which advises the Australian Treasury.

The Treasury document proposes to exempt genuine green-fields projects from review in South Africa. They want to encourage more FDI in this direction.

FDI of the right sort should be encouraged. Otherwise South Africa offers too much of a profit holiday, as it seems to have been doing for some time now.

Fakir is an independent writer based in Cape Town.

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3 Aug

No to Walmart-Massmart Deal

Good story that illustrates our shortcomings with

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