Giraffe and cloudsThere is no doubt that the inclusion of the foreign ownership limitation clause in the Private Security Industry Regulation Amendment Act will mean plenty of pain for both the industry and South Africa, and no obvious gain except for a few lucky, connected shareholders.

The PSIRA Act is currently before President Zuma, awaiting his signature. If signed into law the now notorious clause 20 in the Act will force foreign owned private security firms to overnight yield at least 51{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} of their businesses to South Africans.

The provision would come into force immediately and would lead to a ‘fire sale’ of the affected companies’ shares, providing access to cheap shares for a few lucky shareholders. The entire industry could be thrown into turmoil as a scramble ensued for the ‘juiciest’ assets.

It is important to note that it is not clear precisely which companies would be affected. The provision suggests that all foreign companies in the private security value chain, including, for example, electronics firms, would be affected by the measure. This could hit a significant component of SA’s manufacturing sector, thereby compromising the government’s drive to develop domestic industry. Aside from the core private security firms, other affected companies in the security value chain have been worryingly quiet. Are they in denial about what this expropriation clause means for their businesses, or are they too scared to speak out?

What is clear is that foreign owned companies are likely to respond by disinvesting in order to protect their brands. Besides the obvious impact on jobs, this would have negative implications for competition in the private security industry, and its suppliers, threatening the servicing of existing operations, and particularly at the higher ends of the value chain since it is these segments that foreign companies generally occupy.

Overall this will lead to higher prices for consumers and less access to cutting edge specialist industry knowledge and skills across the value chain.

Ironically, the Act will also not address the alleged national security threat that the Minister of Police argues is the reason for limiting foreign ownership. Foreign owned firms are less than 10{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} of the private security industry and all local employees from guards to management are already required to be South African.

So if empowerment is the real issue, there are far less destabilising ways to achieve this goal.  Furthermore, the same standards should apply to domestic companies – why single out the foreigners?

It needs to be recalled that private security – in every country – fills a ‘government failure’ gap. This is particularly sharp in SA with its high crime levels. How would crime levels in SA be affected by this provision? It certainly won’t help.

This legislation is likely to be rolled out in other policy terrains, adding to the accumulation of legislation undermining foreign, and domestic, investor confidence. Overall these negative implications would compound SA’s already dire unemployment, poverty, and inequality challenges.

Furthermore, our neighbours watch us closely, and copy our policy stances. Should they take up the 51 percent ownership provision – itself perhaps modeled on Zimbabwe’s approach to empowerment – then, taken together with the their condemnation of recent violence against foreigners in SA, access for SA businesses into those markets could also be affected.

Moreover, key foreign trading partners could retaliate, notably the US, UK, Sweden and Switzerland, all of which have companies in the industry. The US could do so through selective graduation of South Africa from AGOA, notwithstanding the apparent resolution of the poultry dispute; whereas the UK, Sweden, and Switzerland could sue South Africa under bilateral investment treaties. These countries, and more, could demand compensation in the World Trade Organisation since SA would be obliged to revoke its commitment there to keep its private security industry market open to foreigners.

As a result SA could find that other domestic economic sectors are hit, not just those connected directly with private security provision.

Implementation of this law will cause instant widespread pain and will exacerbate the chronic suffering already plaguing our economy. It is time for more voices to call for the only solution to the problem; that our President heed the warnings and to send the Act back to Parliament for the removal of Section 20.