Political change in South Africa is already having a significant impact on sentiment in both the local and wider African business sector and legal market, with indications that even more positive news may be just around the corner. A panel of experts talked to The Lawyer about the latest developments.
How would you describe the sentiment in the South African business sector and legal market since the election of Cyril Ramaphosa as president?
Robert Legh, senior partner and chairman, Bowmans: The sentiment has changed fundamentally, both in the business sector generally and in the legal market. We have changed our bus driver and this has resulted in renewed interest in our country from
investors. But this is only the start – other things on the bus have to be changed and fixed.
Assuming the appropriate modifications, including the right policy decisions, are made, we will see a significant increase in investment. This is a second chance for South Africa and we’d better take it.
David Hertz, chairman, Werksmans: There has been a wave of positive sentiment following Ramaphosa’s election. South African business confidence rose to the highest level since before the firing by Jacob Zuma of then-finance minister Nhlanhla Nene
in 2015. There is genuine hope of regulatory certainty and policy stability as Ramaphosa promises to fight corruption and boost economic growth.
Noor Kapdi, CEO – Africa, Dentons: We have experienced buoyancy and a more positive mood from business, social and political commentators.
More interestingly, we have had clients reach out to partners in our locations in Europe and North America expressing interest in investing, and a number of initiatives are being planned by various European offices to inform clients about the South African investment market and opportunities.
Business sentiment in South Africa is positive – Ramaphosa enjoys credibility within the business community” Otsile Matlou, ENSafrica
Otsile Matlou, chief operating officer, ENSafrica: Business sentiment in South Africa is positive. Ramaphosa enjoys credibility within the business community and has enhanced their confidence. It had been dwindling in the country and the election of Ramaphosa has brought a calming effect.
What immediate impact do you expect to see in the South Africa market in terms of busy areas of work as a result of Ramaphosa’s election?
Matlou: The South African economy in general is showing signs of recovery, with some sectors expected to rally. These include mining, retail, banking and finance, agribusiness and technology.
Legh: We have already become quite a lot busier than we were last year, across all areas of work.
Looking back over the past two years, the areas that slowed were M&A, project finance, oil and gas, and, of course, mining. All of them stand to improve.
Probably the most significant development right now is the confirmation by the government that outstanding renewable energy projects need to be implemented. That has already galvanised our project finance team. We’ve received a variety of new M&A instructions.
There is still uncertainty in relation to oil and gas, particularly offshore. This is as a result of the current legislative arrangements. The hope is that these will be clarified and implemented, facilitating more significant investment in this space.
There is still uncertainty in relation to oil and gas, particularly offshore, as a result of current legislative arrangements” Robert Legh, Bowmans
In the mining area, where South Africa still has major mineral potential to be unlocked, industry and government have been at loggerheads – and in litigation – for the past year or two. It is now clear that the new minister for mineral resources has made it his business to fix relations with the mining industry.
Kapdi: We expect to see a resurgence of interest, and investment, in the mining industry. Also, investigations and white-collar crime practices will be kept busy in the endeavour to clean up the business environment. The renewable energy programmes will be significant.
Hertz: The new leadership has resulted in a more pragmatic and predictable business and economic climate. Deepened and accelerated radical social and economic transformation, to deracialise ownership and control of our economy to the benefit of all South Africans, appears to be the thrust. These initiatives include land reform policies, the implementation of free higher education as a way of including unemployed youth, and the broadening of black economic empowerment policies to promote greater worker ownership and board representation.
Is it possible that the election of Ramaphosa will have ramifications for business in other countries on the continent and, if so, what might we expect?
Hertz: Common legal and regulatory challenges are to understand and structure deals in the most efficient way, having regard to exchange controls, local labour and immigration laws, taking advantage of incentives and environmental and competition laws, and required licences or permits. These vary from country to country and the ‘prevention is better than cure’ principle is recommended, i.e. a firm must do a full and proper due diligence with good local advisers.
Legh: The election of Ramaphosa will have multifaceted ramifications for other countries on the continent. Traditionally, South Africa has been seen as the gateway to the continent, where multinationals have historically chosen to base their headquarters. That trend has tapered off in recent years. Quite a few investors have avoided South Africa, either going direct to their chosen investment destinations or using places such as Nairobi as their regional headquarters.
If the change in sentiment since December 2017 is followed by other supportive changes, we may have a shift back to the previous approach, whereby people looking to invest in sub-Saharan Africa use South Africa as a platform. This would mean an investment bounce in South Africa, which would lead to investment flows to the rest of the continent.
Another stream of investment could come from South African businesses, which are among the largest investors into the continent. If business becomes stronger and more confident here, the level of investment into the rest of Africa will increase.
A recently signed free trade agreement means South African corporates can do more business on the continent” Otsile Matlou, ENSafrica
Matlou: The recovery of the South African economy bodes well for the continent. The recently signed free trade agreement between 44 African countries also means that South African corporates can do more business on the continent for the benefit of Africa as a whole. We expect to see South African capital deployed in growth markets on the continent. Similarly, we should see the introduction of African capital into the South African economy.
Kapdi: South Africa is a key entry point into the rest of Africa, and increased interest in South Africa will in all likelihood advance interest elsewhere. We expect to see local companies releasing capital to grow their business in Africa.
What are the most popular industries for foreign direct investment in South Africa and what is influencing that?
Legh: As we speak there is no major foreign direct investment into South Africa but there is renewed interest. As long as the right changes are made, we will see a significant increase in investment in offshore oil and gas, and further investment in renewable energy projects as well as in the fast-moving consumer goods, general projects and infrastructure, mining, and IT and telecoms sectors.
Kapdi: The energy industry is particularly popular now that all the renewable projects that were stalled will continue. Coalbed methane and hydrogen fuel cell developments are areas of interest, and we believe they will gain traction again.
Coalbed methane and hydrogen fuel cell developments are areas of interest, and we believe they will gain traction again” Noor Kapdi, Dentons
Matlou: The automobile, natural resources, retail, technology and telecoms, and financial services sectors are the most popular industries for foreign direct investment.
Hertz: Foreign investment in South Africa and other African countries remains focused on mining, resources and infrastructure. However, manufacturing is also becoming important
What are the most significant legal and regulatory challenges foreign investors face when investing in these industries and how can they be overcome?
Matlou: Challenges include legal and policy uncertainty occasioned by inconsistent utterances by government officials, a lot of legal uncertainty caused by poorly considered or articulated changes to legislation and regulations, the lack of enforcement of laws, and corruption.
The best way of overcoming these is to reaffirm the culture of the rule of law. This requires the enforcement of the legal framework. It also requires parliament to pass clear and certain laws. Regulators and government officials must be consistent in their pronouncements. New laws must balance the interests of investors and other stakeholders, and enable businesses to flourish.
Hertz: Key developments include proposed changes to South African competition law and mining laws, including the Broad-Based Black Economic Empowerment (BBBEE) charter for the mining sector.
The newly formed BBBEE Commission is becoming a force to be reckoned with, and is investigating BBBEE deals. The regulatory environment is changing and developing, and international investors must keep up to date.
The debate relating to ‘expropriation without compensation’ in South Africa will be closely watched” Noor Kapdi, Dentons
Kapdi: Uncertainty relating to the mining charter finalisation remains a problem and it is hoped that this will be settled at the earliest opportunity. This aspect speaks to black empowerment companies’ participation in the industry. The debate relating to ‘expropriation without compensation’ in South Africa will be closely watched and will create concern.
Legh: In line with the rest of the world, the level of regulation in South Africa and other prominent sub-Saharan investment destinations has increased in the past decade. In South Africa, investors need to pay particular attention to black economic empowerment requirements.
The antitrust system has also become more protracted, mainly because of the focus by the Department of Economic Development on extracting public interest concessions when approving major new investments. AB InBev, Coca-Cola Bottling Africa, Kansai Paints and Walmart are examples of this.
But none of these challenges are insurmountable. South Africa, and the rest of the continent, offers good potential for business.
What legislative or regulatory developments in Africa over the past 12 months should investors pay most attention to?
Matlou: In South Africa, key legislative and regulatory developments include sorting out the mining charter and mining laws more generally, tackling competition law and addressing the much-publicised ‘land expropriation’. In the rest of the continent there seems to be a greater drive for enhancing or introducing local content laws and revising mining legislation. In addition, the free trade regime that was recently signed means intra-
Africa trade is going to be a priority.
Hertz: Ramaphosa has undertaken to initiate amendments to the constitution to allow for land expropriation without compensation. The broader context is to bring about reform through land policies that increase agricultural production.
Kapdi: Across the continent, change is likely to come from better co-ordination of competition legislation and closer collaboration between competition authorities. Increasing environmental enforcement capability will require response capability by clients and greater compliance obligations. Data protection regulation is increasingly being implemented in the continent and requires an ability to shape business practices to ensure compliance.
Legh: One of the things to watch is the finalisation of the Competition Amendment Bill, whereby the government is seeking higher levels of compliance and regulation through so-called market inquiries. This is driven by the assumption that the South African economy is overly concentrated and the belief that this concentration should be diluted. The government also recognises that, in a number of areas, it is important for South African companies to have sufficient scale to compete regionally and worldwide.
Foreign investment in Africa remains focused on mining, resources and infrastructure, but manufacturing is also becoming important” David Hertz, Werksmans
The second major legislative change will be the finalisation of the new mining charter, on the basis of what is essentially agreed between the mining industry and government. In a recent television interview the minister for mineral resources said the government subscribed to the principle of ‘once empowered, always empowered’. That is significant progress.
A third area would be clarification of the offshore oil and gas regime.
Other things that need attention include developing a user-friendly telecoms and IT environment. Compared with some other African countries we are behind the curve. The cost of data is prohibitively high and I do not think we are up to speed with the available technology. In Kenya, for example, connectivity is much better than in South Africa.
The big unknown is the question of how the government plans to support its policy of ‘expropriation without compensation’. This is an area investors will need to watch carefully. On a pragmatic level I think the government recognises that land reform in the past 25 years has been a failure, but not for want of available land or funding to support land acquisition.
The pragmatists also see the importance of ensuring food security and a sensible programme for further land acquisition. But, at a more populist level, this is a very emotional topic with the potential for an unpredictable outcome.
What other factors will be instrumental to the success of the South African market over the next year?
Hertz: Ever-increasing legislation, more focus on compliance and evolving tax regimes should indicate a boon for legal firms, but the legal sector in South Africa is not without its challenges. The rapid evolution of technology, virtual law firms and rising operating costs are headwinds for local firms.
Matlou: South Africa needs to fight corruption in state institutions and the private sector. It needs to stimulate economic growth and attract investment. In addition, the interests of the poor and the workers must be balanced with the need to create a business-friendly environment. Finally, Ramaphosa must provide strong leadership, like Nelson Mandela [see statue below] and Thabo Mbeki. If all this is in place, South Africa will be well on its way to recovery.
Kapdi: The release of domestic capital would enforce confidence in the market.
Domestic capital was tied in during the Zuma era due to the unsatisfactory trajectory
followed on governance and increasing allegations of corruption.
Legh: We have essentially had a change in government and a significant turnaround in confidence. Other than the land issue, all the changes so far – including changes in the Cabinet – have been positive. But a change in leadership and personnel is not enough. A number of areas of the economy are under significant stress and remedial action is required. Examples include Eskom, SAA and other underperforming state-owned enterprises.
I am an optimist. We will succeed” Robert Legh, Bowmans
There needs to be comprehensive and co-ordinated planning so that issues of energy security, water security and food security are properly tackled.
It is also important that confidence be restored in the revenue service and the criminal justice system. The public need to feel they are being fairly treated by the revenue service and that the police and the National Prosecuting Authority can get on with doing their jobs without political interference.
I am an optimist. We will succeed.
This article is taken from The Lawyer’s monthly magazine. The latest issue contains insights into the top US firms in London and legacy at top firms, plus in-house interviews and key findings from the FTSE 250 2018 report. To subscribe please click here.
If you already have an online subscription, you can contact email@example.com to upgrade to print and online.