B-BBEE need not deter foreign investment to South Africa, says EY

27 December 2017 Authored by Consultancy.co.za

Steady foreign investment is absolutely critical for the South African economy in years to come, and despite a number of conducive factors in the country, the extra regulations that accompany the Broad-Based Black Economic Empowerment (B-BBEE) Act have traditionally deterred international firms from the market. EY explains how this need-not be the case.  

Now more than ever, South Africa is in need of free-flowing investments. The country’s economy has been navigating a major economic slump, particularly since oil prices plummeted to less than $35 per barrel in 2015. To make matters worse, a dip in the prices of precious metals such as gold and platinum has hindered growth of the mining industry – perhaps one of the most crucial sectors in the country.

Nevertheless, broad economic indicators suggest a promising future for the country, provided it can make its way through this rough patch. Domestic businesses have expressed optimism about the future, devising major plans for growth and investment in years to come.

In terms of foreign investment as well, the country’s policies and market conditions are largely conducive to profitable investments from international companies. The country ranks among the top five countries in Africa in the World Bank’s ‘ease of doing business’ indicator. Analysis conducted by Big Four accounting and advisory firm EY also revealed that the country scores an 8 on a scale of 1-10 for openness to foreign investment. 

This scenario has reaped its benefits. FDI projects into the country generate approximately $5 billion (R63 billion) annually, most of which comes from the US. However, one perceived deterrent to foreign investment, which is relatively unique to the South African scenario, is the B-BBEE act and its stipulations.

B-BBEE need not deter foreign investment to South AfricaIn order to ensure that economic growth permeates to all segments of society, particularly ethnically Black African, Coloured, or Indian people, the B-BBEE act lays down Codes of Good Practice, through which firms can gain points. These codes are: Ownership (25 points), Management Control (19), Skills Development (25), Enterprise and Supplier Development (40), Socio-economic development (5). As a result, a number of domestic firms have been actively restructuring their ownership in order to comply with the regulations.

The requirement of redistributing ownership, in particular, has been problematic for multinationals over the past few years. However, according to EY, the South African government has taken measures to address this issue. The B-BBEE codes have been modified, to some extent, to allow multinationals an alternative to ownership requirements, in the form of an Equity Equivalent Investment Program. 

In essence, through compensation of 25% of the value of South African operations over a ten-year period at most, or provision of 4% of the turnover of the South African Operation, multinational firms have a chance of earning all 25 of the ownership points available. Concessions like this, according to EY, combined with the profitable conditions, should be enough to draw major investments into the country.

Moreover, the firm highlights that there are long-term benefits of equitable growth, in terms of profitability to firms. In essence, distribution of benefits across comunities will lead to the broad development of skills, the creation of jobs, overall economic development, and broader supplier development, among a number of other induced benefits.

In conclusion, the firm states, “At EY, we strongly encourage active dialogue and collaboration, which is an action required to realise our country’s and continent’s possibilities. We have seen in recent times collaboration with government and business in the interests of the community at large, achieving great milestones across the continent. Partnership, co-operation and collaboration across the private, public and social sectors could be a powerful force for transformative change and growth.”