Giraffe and clouds

As the US-Africa summit unfolds in Washington, CNBC Africa interviewed me on this topic and its implications for AGOA renewal. Check out the interview here.

The Private Security Industry Regulation Act (PSIRA) Amendment Bill is on President Zuma’s desk, awaiting his signature. Passed at the last minute by the National Council of Provinces prior to the elections, it is mostly useful, regulating a difficult sector.

But Section 20 introduces a highly problematic ownership clause targeted at foreigners that will have far-reaching ramifications if implemented. It obliges foreign ‘security service providers’ to relinquish 51 percent ownership to ‘South African citizens’. This extends to manufacturers and importers of security related equipment, bringing electronics companies, for example, into the frame, thus impacting a significant chunk of our economy.

The proffered rationale is ‘national security’. However, the foreign-owned component of the industry accounts for less than 10 percent of total turnover. Does the government fear that private armies operated by foreign providers will march on the Union buildings? Do they fear the surveillance capacity such providers possess, or theoretically could acquire?

PSIRA already requires everyone involved in the industry to be an SA citizen or permanent resident. So forced divestitures do not address the private armies ‘problem’. Furthermore, the vast majority of security companies’ employees, whether foreign owned or domestic, are South African, most of whom probably voted for the ANC government.

If the surveillance rationale holds then other regulatory instruments could manage the ‘problem’, such as restrictions on deployment of equipment and who could be monitored. These should apply equally to domestic and foreign companies.

Consequently if passed the legislation will be challenged, up to the Constitutional Court. It will almost certainly be found to be irrational, the key test for new legislation, since the security argument is unfounded. Therefore it would be struck down.

Furthermore, forced divestiture amounts to arbitrary deprivation of property, albeit not expropriation since subsequent ownership would not reside in the state. Therefore compensation would be due, but the bill does not provide for this.

The divestiture provision would also have a major chilling effect on foreign investment. Which sector would be next? Would multinational corporations risk investing in a country that arbitrarily deprives foreigners of their money and removes control over their investments? If South Africa were like China – a huge market with many suitors – we might just get away with it. But in truth this legislation makes us more like Venezuela; hardly a magnet for foreign investment.

The problem goes beyond the PSIRA bill. The Department of Trade and Industry recently published its draft Promotion and Protection of Investment Bill, which seeks to provide a predictable basis for regulating foreign investment while preserving the right of the state to regulate. The bill succeeds on the latter count, but key provisions, if implemented, would undermine foreign investor confidence across the board.

Take two. First, it redefines expropriation along PSIRA’s lines: foreigners could have their shares taken and given to SA citizens, with no compensation due. Second, all incoming investments could be subjected to government screening on undefined ‘public interest’ grounds. This gives the minister arbitrary discretion to decide who he would allow in, and under what conditions. Foreign investors with options – all of them really – would look elsewhere if these provisions were enacted.

And PSIRA breaches our international trade obligations. In the World Trade Organization’s Uruguay Round, SA did not impose any restrictions on foreign investment into the sector. We could revoke this concession, but our trading partners would either be entitled to compensation or could retaliate.

And the US Congress would take a very dim view of forced divestitures effecting its companies. About 45 percent of SA’s US exports – our second largest export destination – enter under the Generalised System of Preferences; those benefits, extended unilaterally by the US, would quite likely be withdrawn.

Put all this in economic perspective. A bill that does not meet the rationality test would have a major chilling effect on inward FDI, and our exports to the US and Europe would take a hit. How does this get the country to President Zuma’s 5 percent growth target?

If we don’t meet that target, youth unemployment will only grow, our social crisis will intensify and ultimately become a political crisis of significant proportions.

President Zuma needs to do the right thing and send the bill back to Parliament to have section 20 removed.

Note: This blog was published in the New Age Newspaper, on July 7th, 2014.