O 121434Z MAY 03
FM AMEMBASSY PRETORIA
TO SECSTATE WASHDC IMMEDIATE 1586
AMCONSUL CAPE TOWN PRIORITY
AMCONSUL DURBAN PRIORITY
AMCONSUL JOHANNESBURG PRIORITY
INFO SOUTHERN AFRICAN DEVELOPMENT COMMUNITY
UNCLAS SECTION 01 OF 03 PRETORIA 002471
E.O. 12958: N/A
TAGS: EAID PREL PGOV ECON SF
SUBJECT: FOREIGN INVESTMENT IN SADC.
SUMMARY
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1. THESE TWO REVIEWS OF FOREIGN INVESTMENT PRESENT SOME NEW OR
DIFFERENT INFORMATION ON THE PICTURE. THE STUDY ON EUROPEAN
INVESTMENT INTO SOUTHERN AFRICA EMPHASIZED THAT ALL THE FIRMS SELL
LOCALLY, BUT ONLY 14% OF THE FOREIGN OWNED FIRMS EXPORT FROM THE
REGION. THEIR MAIN REASON FOR BEING IN SADC IS TO SELL TO SADC,
NOT TO EXPORT AND NOT BECAUSE SADC IS AN INEXPENSIVE PLACE TO
PRODUCE. AGOA IS CHANGING THIS, BUT MAINLY FOR TEXTILES AND
CLOTHING (WHICH ARE LIKELY TO LEAVE SADC ONCE PREFERENTIAL ACCESS
IS WITHDRAWN). PRIVATIZATION (INCLUDING PUBLIC-PRIVATE
PARTNERSHIPS) IS A GOOD WAY TO ATTRACT FOREIGN INVESTMENT, BEING
THE REASON GIVEN FOR 19% OF THE FIRMS BEING HERE.
2. FDI IS NOT A GOOD WAY TO CREATE JOBS. WHILE A QUARTER
EXPANDED EMPLOYMENT, A THIRD CONTRACTED EMPLOYMENT IN THE LAST FIVE YEARS.
TWO-THIRDS OF THE FOREIGN FIRMS EMPLOY EXPERTS; IN 1/3 OF THE
CASES THERE WAS LOCALIZATION OF FOREIGN POSITIONS, THUS DECREASING
THE NUMBER OF FOREIGNERS AND INCREASING TECH TRANSFER.
3. HALF THE FOREIGN FIRMS EXPECT TO EXPAND IN THE NEXT FIVE
YEARS COMPARED TO 10% OF THE FIRMS (ALMOST ALL IN ZIMBABWE) WHO EXPECT
TO CONTRACT.
4. INCENTIVES WILL NOT WORK IN ATTRACTING FIRMS TO SOUTHERN
AFRICA AS THEY COME DUE TO FACTORS NOT INFLUENCED BY INCENTIVES
(SIZE OF THE MARKET, PRIVATIZATION, AND PERSONAL REASONS) BUT WILL
5. WORK IN DECIDING LOCATION ONCE THEY HAVE DECIDED TO COME TO
THE REGION. THIS MAKES INCENTIVES ESSENTIALLY A ZERO-SUM GAME FOR
THE COUNTRIES IN THE REGION.
6. THE REVIEW OF FOREIGN INVESTMENT IN AFRICA NOTED THAT TOTAL
RESOURCE FLOWS TO NON-SOUTH AFRICA SUB-SAHARAN AFRICA HAVE FALLEN
SLIGHTLY SINCE THE EARLY 90S BUT THIS IS BECAUSE OF REDUCED
FOREIGN DONOR LOANS (REDUCED WORLD BANK ACTIVITY). THERE HAS BEEN
AN INCREASE IN FOREIGN DOMESTIC INVESTMENT AND FOREIGN DONOR
GRANTS HAVE BEEN ROUGHLY CONSTANT. THE PICTURE IS DIFFERENT FROM
OTHER REGIONS WHICH HAD A LARGE EXPANSION IN FOREIGN DIRECT AND
FOREIGN PORTFOLIO INVESTMENT IN THE MID-90S BUT WHICH HAVE HAD
REDUCTIONS SINCE THEN.
7. ALSO INTERESTING IS THAT FDI IN ALL OF SUB-SAHARAN AFRICA HAD
ACCOUNTED FOR 3.6% OF TOTAL INVESTMENT IN THESE COUNTRIES IN THE
EARLY 90S, BUT ACCOUNTS FOR OVER 11% NOW. WITH FDI INCREASING IN
ABSOLUTE AMOUNTS, THE PICTURE EMERGES THAT IT IS NOT FDI THAT IS
ABANDONING SUB-SAHARAN AFRICA, IT IS AFRICAN DOMESTIC INVESTMENT,
AND FOREIGNERS ARE NOT INVESTING ENOUGH TO MAKE UP FOR THIS
DECREASE.
8. US DATA SHOWS THAT THE RATE OF RETURN ON AFRICAN INVESTMENTS
IS THE HIGHEST OF ANY REGION, 21% NOW COMPARED TO 30% IN THE EARLY
90S. WHILE SOME ARGUE THAT THIS IS BECAUSE OF GREATER VOLATILITY
IN RETURNS IN AFRICA THE DATA DOES NOT BEAR THEM OUT. AFRICA'S
VARIABILITY IN RETURNS IS CLOSE TO THAT IN THE MIDDLE EAST AND
LOWER THAN THE VARIABILITY IN SOUTH AMERICA WHERE THE AVERAGE
RETURNS ARE LESS. PERCEPTIONS OF RISK ARE HIGHER. END SUMMARY.
BACKGROUND
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9. THIS SUMMARIZES PAPERS PRESENTED AT A WORKSHOP ORGANIZED BY
THE OFFICE OF THE PRESIDENCY ON 9 APRIL 2003. THE FIRST DEALS
WITH EUROPEAN INVESTMENT IN SADC AND THE SECOND WITH FOREIGN
INVESTMENT IN SUB-SAHARAN AFRICA. THE PRESENTATION WAS PART OF AN
EFFORT BY THE OFFICE OF THE PRESIDENCY TO PRESENT NEW RESEARCH ON
TOPICS OF CRUCIAL INTEREST TO SA.
JENKINS AND THOMAS: FDI IN SOUTHERN AFRICA
------------------------------------------
10. THE JENKINS/THOMAS PAPER IS A RESULT OF INTERVIEWS WITH 81
UK, SWISS AND GERMAN FIRMS ON THEIR INVESTMENTS IN SADC.
WHY INVEST IN SADC?
-------------------
? 84% - SIZE OF THE LOCAL MARKET,
? 40% - LOCAL RAW MATERIALS
? 26% - PERSONAL REASONS
? 21% - STRATEGIC REASONS (NEAR PARTNERS)
? 19% - PRIVATIZATION OR PUBLIC-PRIVATE PARTNERSHIPS.
11. FIRMS ARE IN SADC TO SELL TO SADC, NOT FOR EXPORT (EXCEPT
FOR THE MINERAL COMPANIES) AND NOT BECAUSE THE AREA IS A CHEAP
PLACE TO PRODUCE. BECAUSE THEY ARE IN THE REGION FOR THE LOCAL
ORE FOREIGN FIRMS WILL INVEST, BUT THEY ARE MOST LIKELY TO INVEST
IN SA.
12. MORE INTERESTING IS THEIR RESULTS ON THE DESTINATION OF THE
OUTPUT FROM THEIR INVESTMENT. ALL SUPPLIED THE LOCAL MARKET, WITH
45% SUPPLIED THE REGIONAL MARKET AND 14% EXPORTED OUTSIDE THE
REGION. FOR ALMOST ALL FIRMS THE REASON FOR INVESTING IS LOCAL,
NOT TO USE SADC AS A BASE FOR EXPORTS (TEXTILES AND GARMENT
MANUFACTURERS ESTABLISHED DUE TO AGOA ARE A RECENT NON-EUROPEAN
EXCEPTION).
13. ALL OF THE NON-PRIMARY SECTOR FIRMS EXPORTING GLOBALLY ARE IN
SA AND THEIR ORIGINAL REASON FOR COMING TO THE REGION WAS TO
SUPPLY THE LOCAL MARKET. ELSEWHERE IN SADC FIRMS SELLING LOCALLY
ARE NOT DEVELOPING AN EXPORT CAPACITY.
14. IMPLICATION SADC: THESE RESULTS SUGGEST BOTH THE IMPORTANCE
OF EXPANDING THE REGIONAL MARKET TO INCLUDE SADC AS THE LARGER MARKET
WILL ATTRACT ADDITIONAL FOREIGN INVESTMENT, AND THE NEED TO MAKE
CROSS-BORDER MOVEMENTS EASY. AT PRESENT SA WILL ATTRACT NEW
INVESTMENT TO SELL INTO SADC BECAUSE OF THE SIZE OF THE SA MARKET.
TO OVERCOME THIS ADVANTAGE, SADC MUST MAKE THE REGION APPEAR AS
ONE. UNLESS THAT OCCURS, THE BENEFITS OF FDI IN TERMS OF INCOME
AND JOBS WILL FLOW OVERWHELMINGLY TO SA.
JOB IMPACT
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15. FDI IS USUALLY PRESENTED AS CRITICAL TO JOB AND INCOME
GROWTH. UNFORTUNATELY ONLY A QUARTER OF THE FIRMS EXPANDED EMPLOYMENT
IN THE LAST FIVE YEARS (AND MOST OF THESE WERE NEW INVESTMENTS) WITH
OVER A THIRD CONTRACTING. ONLY HALF OF THE FIRMS THAT EXPANDED
PRODUCTION RECENTLY ALSO EXPANDED EMPLOYMENT WITH A NUMBER
EXPANDING PRODUCTION AND DECREASING EMPLOYMENT.
16. THERE ARE FREQUENTLY COMPLAINTS ABOUT THE NUMBER OF
FOREIGNERS EMPLOYED, AND 2/3 OF THE FIRMS HAD EXPERTS BUT 1/3 HAD
LOCALIZED PREVIOUSLY FOREIGN POSITIONS.
FUTURE PLANS
------------
17. ALMOST 2/3 OF THE FIRMS HAVE EXPANDED (OR STARTED) IN THE
LAST FIVE YEARS AND JUST OVER HALF PLAN TO EXPAND IN THE COMING YEARS.
ONLY 8% HAVE CONTRACTED OF LATE AND 10% EXPECT TO CONTRACT IN THE
COMING YEARS. MOST OF THE CONTRACTIONS ARE CONCENTRATED IN
ZIMBABWE. THE PICTURE FOR THE REST OF THE REGION IS THUS MUCH MORE
OPTIMISTIC PICTURE.
TYPE OF INVESTMENT
-------------------
18. HALF THE NEW INVESTMENTS WERE GREENFIELD (NEW ENTITY) AND
MOST OF THESE ARE IN SERVICES AND USUALLY ARE WHOLLY CONTROLLED BY
THE FOREIGN OWNER. ACQUISITIONS, WHICH ARE MORE LIKELY TO BE IN
PRIMARY PRODUCTION, ARE USUALLY WITH A LOCAL PARTNER. THESE
ACCOUNT FOR JUST OVER 1/3 OF THE TOTAL BUT ARE OF INCREASING
IMPORTANCE.
LEAPE: FDI IN AFRICA
--------------------
19. LEAPE'S PAPER IS A REVIEW OF CURRENTLY AVAILABLE DATA ON FDI.
20. IN THE 90'S RESOURCE FLOWS TO NON-SA SUB-SAHARAN AFRICA
DROPPED SLIGHTLY. BUT THE DROP WAS ALMOST SOLELY DUE TO THE
REDUCTION IN LONG-TERM OFFICIAL LOANS (ESSENTIALLY THE WORLD BANK)
WITH FOREIGN GRANTS REASONABLY STEADY AND PRIVATE FDI INCREASING.
PRIVATE FDI TO NON-OIL PRODUCING COUNTRIES GREW SLIGHTLY FASTER
THAN FDI TO OIL PRODUCERS AND THE TWO ARE APPROXIMATELY EQUAL NOW.
COMMERCIAL BANK LENDING, NEVER VERY HIGH, BECAME ESSENTIALLY
NEGATIVE AS REPAYMENTS BECAME GREATER THAN NEW LOANS.
21. THE SITUATION WITH ALL LOW-INCOME COUNTRIES IS DIFFERENT. FDI
(AND PORTFOLIO INVESTMENT) OUTSIDE AFRICA BOOMED IN THE MID-90S
AND THUS THE COLLAPSE IN PORTFOLIO INVESTMENT AND THE REDUCTION IN
FDI HAD A MUCH GREATER IMPACT IN THE LATE 90S AND EARLY IN THE NEW
CENTURY. COMMERCIAL BANK LENDING WAS MORE IMPORTANT EARLY IN THE
90S BUT, AS IN AFRICA, HAS TURNED NEGATIVE.
22. ALL OF SUB-SAHARAN AFRICA'S SHARE OF FDI HAS FALLEN SINCE THE
80S, BUT HAS BEEN ROUGHLY CONSTANT AT 3.4% SINCE THE MID-90S. THE
SAME PATTERN EMERGES EVEN IF WE EXCLUDE OIL-PRODUCING AFRICAN
COUNTRIES.
THE 80S FDI IN NON-OIL EXPORTERS IN
AFRICA WAS 3.6% OF THE REGION'S TOTAL INVESTMENT WHILE IT IS OVER
11% NOW. FOR LOW-INCOME COUNTRIES GENERALLY THE INCREASE WAS ONLY
FROM 3.3% TO 7.9%. THIS APPEARS TO CHANGE THE CONCLUSION FROM
FOREIGN INVESTORS ABANDONING AFRICA TO ONE OF DOMESTIC AFRICAN
INVESTORS ABANDONING AFRICA. THE INCREASE IN FOREIGN INVESTMENT IS
INSUFFICIENT TO MAKE UP THE FALL IN DOMESTIC INVESTMENT. IN ANY
CASE, DOMESTIC INVESTMENT ACCOUNTS FOR 89% OF TOTAL INVESTMENT,
ATTENTION SHOULD BE PAID ON INCREASING IT, FINDING WHY ITS
IMPORTANCE TO THE ECONOMY HAS FALLEN, WHY RESIDENTS ARE NOT
INVESTING.
24. US DATA SHOWS THAT CURRENTLY THERE IS A 21% RETURN ON
INVESTMENTS IN SUB-SAHARAN AFRICA; IT HAD BEEN 30% IN THE EARLY
90S. THE AVERAGE RETURN IS MUCH HIGHER THAN FOR ANY OTHER REGION.
FOR EXAMPLE THE AVERAGE RETURN IS 9.5% IN SOUTH AMERICA AND 14.8%
IN THE MIDDLE EAST. WHILE THE VARIANCE IN INVESTMENT IN SUB-
SAHARAN AFRICA IS HIGHER, THE COEFFICIENT OF VARIATION IS
APPROXIMATELY THE SAME AS IN THE MIDDLE EAST AND BETTER THAN IN
SOUTH AMERICA. THE VARIABILITY IS CONSIDERABLY GREATER THAN IN ANY
OF THE RICHER COUNTRIES.
HUME