Investment Climate Survey: briefing by Department of Trade and Industry

Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
14 March 2006
INVESTMENT CLIMATE SURVEY: BRIEFING BY DEPARTMENT OF TRADE AND INDUSTRY

Chairperson:

Department of Trade and Industry (DTI) Presentation on the South African Investment Climate Survey
Investment Climate Survey (ICS) – pdf format
World Bank Investment Climate Survey website

SUMMARY
The DTI said that the Investment Climate Survey (ICS) was managed by the World Bank and was based upon an analysis of 803 mainly large manufacturing firms. The study was done across four provinces and was representative of business. There was a bias in the sampling in that it was not representative of all the provinces, and the study focused mainly on manufacturing.

The survey found that the cost and burden of complying with regulations was not especially high in South Africa. Firms said that they spent about half a day per week dealing with regulation issues. In comparison, managers spent about a day and a half on these issues in Lithuania and China. However, South Africa could improve on the amount of time that imports and exports took to clear at the ports. Inflation was moderate and stable in South Africa which was a favourable position in comparison to Kenya. A question that could not be avoided, however, was that if the climate for investment was so good, why were the investment levels into the country so low?

MINUTES
Mr David Jarvis, the Department’s Policy Co-ordinator, explained that the ICS was managed by the World Bank and was based upon an analysis of 803 mainly large manufacturing firms. The Word Bank had completed similar reports in over 50 low and middle income countries, which enabled the DTI to make comparisons with other countries. This report was completed in 2004 and delivered to the DTI in August 2005. The study was done across four provinces and was representative of business. There was a bias in the sampling in that it was not representative of all the provinces, and the study focused mainly on manufacturing.

Some of the findings were that up to 90% of South African firms were very confident that courts would protect their property rights. This figure was much higher than in other African countries such as Kenya and Senegal. South Africa was also doing well comparatively in how long it took to resolve cases of overdue payments in court. The cost of energy in South Africa was also extremely low in comparison with countries like Kenya and Senegal.

The cost and burden of complying with regulations was not especially high in South Africa. Firms said that they spent about half a day per week dealing with regulation issues. In comparison, managers spent about a day and a half on these issues in Lithuania and China. Few firms in South Africa (less than 10%) found that they had to pay bribes ‘to get things done,’ as compared to Ecuador and Kenya where about 60% - 70% of firms there had to pay bribes.

However, South Africa could improve on the amount of time that imports and exports took to clear at the ports. Inflation was moderate and stable in South Africa which was a favourable position in comparison to Kenya. About a third of the South African firms did consider that a lack of worker skills, macroeconomic instability in the strength and volatility of the Rand (especially among those firms that exported goods), and the strict labour regulations were obstacles to economic growth. The cost of preventing crime and related security was high for firms, but was not comparable to the worst countries in South and Central America. South African labour productivity was high but the cost of labour here was similarly high when compared to other countries in Africa and China.

In conclusion, the ICS was generally positive about the investment climate in South Africa and Government was already trying to deal with some of the areas that were concerns. A question that could not be avoided, however, was that if the climate for investment was so good, why were the investment levels into the country so low? Future work on the investment climate would need to be more detailed with analyses on Small to Medium Sized Enterprises, the impact of Black Economic Empowerment, market concentration, service industries and South Africa’s comparative advantages.

Discussion
Dr P Rabie (DA) asked why the clothing and textiles sectors were examined separately in the survey. How did South Africa’s successful automotive industry compare to those of other countries?’ the investment into South Africa was very ‘liquid’ and capital-intensive. The financial sector was very strong and maybe the Banking Charter had to be re-examined to create more job opportunities.

Mr Jarvis replied that those sectors were examined separately to show more accurately the labour-intensive value-add of the sector compared to the capital-intensive manufacturing sector. He was unsure how many motor companies were included in the survey, but this study was not the most accurate source of information about the sector. For example the Motor Industry Development Programme (MIDP) Review recently compiled by the DTI would be a better source. There had been growth in the economy but this had not been transformed into meaningful investment. Here things like poor infrastructure were a constraint, so Government had a major role to play.

Dr E Nkem-Abonta (ANC) said that such a study was overdue but it was incomplete. It would have been more useful for international companies to give input and give reasons why they were not investing here. The fact that small businesses were excluded from the survey presented a ‘skewed’ image especially in terms of the burden of complying with regulations. Big firms did not battle with this, but it was well known that small firms that battled with regulations. He said that the countries South Africa was being compared with were not appropriate. South Africa was not in the same league as China and Ecuador. Countries like Slovakia, Hungary and the Czech Republic would have been better.

Mr Jarvis said that the DTI was developing an investment policy, with a lot of research going into that. It would be interesting to find out from foreign firms why they were not investing here and this would be included in the policy. The lack of analysis of small businesses was definitely one of the weaknesses of the survey. The Presidency commissioned research into the regulation of small businesses and the impact of regulations on these businesses. The DTI was involved in this and the process would be completed towards the end of the year.

Mr L Laubuschagne (DA) said that some of the factors looked at seemed very selective. How did South Africa compare with countries that were doing well to attract investors?

Mr Jarvis said that the ICS was done within developing and middle-income countries and so these formed the basis of the comparison. There was no bias in choosing the countries.

Ms D Ramodibe (ANC) asked if the DTI knew how many South African firms were investing outside the country, and what the impact of this was.

Mr Jarvis said that this was not looked at in this study and did not really know what the extent was. The question here, was why were South African firms investing abroad in places such as the Democratic Republic of Congo instead on investing here.

Dr Sefularo (ANC) asked about the impact of HIV/AIDS on the firms in the study. Was this really an investment climate survey, or a competitiveness study?

Mr Jarvis said that HIV/AIDS was an issue for firms in that the disease increased absenteeism, but it was not a really big issue for them compared to things like shortages of skills. The survey was not a competitiveness study.

The meeting was adjourned.