Africas First Welfare State

The Experience of South African Firms Doing Business in Botswana

South African Institute of International Affairs17 May 2005

Outline MethodologyKey economic data SA trade and investment linkages with BotswanaResults of SAIIA surveyImpact of SA business presence/FDI Policy recommendationsKey findings

MethodologyQualitative and quantative in-country survey of SA companies in BotswanaRepresentative sample group every sector Interviews with gov departments, academics, donor agencies, development bodies, private sector institutionsData from companies supplemented by BIDPA, BOB, BEDIA, MFDP, UNCTAD and others

Socio-Economic Snapshot 2002

GDP by Economic activity

Sectoral breakdown of GDP, 2003

NDP8 Gov budget Review(Estimates and Actual, P m)

Total number of employees by sector, BOB

Is Botswana facing a new economic paradigm? Far-sighted use of foreign reserves: free education, health services, housing, entrepreneurship (40% of budget on social development and reaches 40% of population) 90% of development funds provided by Botswana government (cumulative development spending 70% higher than initially envisaged) Presented a budget deficit in 1998/99, after 16 years of operating a budget surplus (last budget deficit 1982/83)Slowdown compounded by: global economic downturn after 2001, diamond production has peaked, foot & mouth disease, HIV/Aids, drought, Zimbabwe crisisVision 2016: eradicate absolute poverty requires growth of 8% (instead 4 - 5% expected)

Trade and investment linkages: SA and Botswana

Shared cultural and colonial history familiar, operating environment Pragmatic political stance Defining feature of South Africas economic relationship with Botswana is SACU SA is Botswanas largest import partner, whereas majority of Botswanas exports directed at Europe (perpetuates North-South trade linkages despite SACU) Enjoys healthy trade surplus with the rest of the world Exports: R6,419 bn & imports R 403m.

Botswanas trade partners, 2001, BOB

Investment by Source, 2000, BOB

Value of Investment by country, Pm

Investment by Sector, 2000, BOB

FDI inflows: select SADC countries, 1989 2002, $m

Comparison: FDI Stock as % of GDP, 1999, UNCTAD

Results of SAIIA SurveyMany SA company involvement predate 1994 (attracted by generous incentives and political stability)Several companies settled so long regard themselves as indigenous Botswana companiesMany newcomers in retail, franchise highly visible strongly associated with South Africa motivated by SACU (duty free access), high disposable income, safe environment, geographical proximity, infrastructure, labourLargest investment into mining, De Beers through Debswana (Orapa mine)Dominant players in market: primarily Greenfield and acquisitions, some joint ventures98% of employees are locals (represented at every level)

Results cont. Business friendliness: Very favourable (incentives for foreign-owned businesses, receptiveness of gov to policy input, low corruption)FDI incentives: foreign exchange controls abolished in 1999, corporate tax 15% (manufacturing companies + IFSC), no prohibitions on foreign ownership, maximum personal and marginal tax rate 25% (regions average 35%), VAT of 10% also lowest in SADCPrivate-public relations on sound footingStrong confidence in the courtsSome companies that have been in Botswana over 15 years did complain about deteriorating business morals

Main constraintsDominant role of government indirectly flagged re cost of utilities, unfair competition of parastatals, lack lustre performance outside miningHigh confidence in fiscal prudence and sound management policy, as well as acknowledgement of broader debate of role of governments in developing societiesMarket size most critical concern (high disposable income misleading high inequality (24% under $1 a day, 50% under $2 a day), payment difficulties - highly indebted society, access to finance difficult (prime rate about 15%), still cash-driven economy

Main constraints cont. Labour: Lack of skilled labour, biased towards British system, qualified unemployment, also result of rapid growth of economy and impact of HIV/Aids, xenophobia (lowest ranking that Botswana has ever received from Africa Competitiveness Survey (20th out of 24th) in 2001 Bureaucracy: slow processing of work permitsUnfair competition: Construction and property development (profit margins in infrastructure development slim, BOT projects rare)Cost of utilities high: Water and electricity (drives up manufacturing costs)Constraints identified close correlation with WEF survey

Impact of SA investmentSA investors have had considerable impact (early entry & number of companies), prudent management of diamonds with De Beers laid foundation for economyContributed to diversification of economy, employment creation, raised competitive levels, instill business culture, built local capacityMake contributions to medical aid & pension funds, severance benefits, social programmesSome concern about hegemonic influence of SA business (enforced huge trade imbalance, negligible domestic linkages between two economies) SA retailers have taken advantage of building of several malls (anchor tenants), however, sector is overtraded

Impact cont. Despite encouragement to procure locally most companies procure from SABotswana suppliers complain retail sector uses country as a market for SA products, undermining local manufacturing capacity, buying authorities located in SA, no trade-off between two countriesMany restaurant franchises catering for urban youth + upwardly mobile middle class viewed positively creating local employment, transfer business skills, ingredients obtained locally (support agri sector)Although SA most significant investor in Botswana, has not fulfilled governments employment targets, nor significant impetus to improve local manufacturing Some gov officials and academics expressed open disappointment in quality of SA investment

Negative impact of SA policies on Botswanas economic objectives Survey found that many economic policies adopted by the SAG to address local imbalances economy have unintended consequences in BotswanaExamples: Failure of Hyundai Assembly plant in 2000, the EU TDCA, SA tax legislation on IFSC, exchange rate volatility In 2001 the SAG introduced new tax legislation requiring SA companies operating in foreign countries that charged a lower tax rate then in SA to pay additional taxes if it was less than 90% than the SA rate affected all SA companies operating in BotswanaOnly addressed in 2003 when new double taxation agreement was concluded

Policy Recommendations to BotswanaBEDIA to be strengthenedAppointment of foreign skilled workersUtility costs to be brought downPriority to employment creationStigma of HIV/Aids to be addressedIncrease productivity levelsSmall business should receive priorityRegulation (property and banking sector) strengthenedAct more quickly on issues raised by private sectorExploit other resources (gas, gold, coal)

Policy Recommendations to South AfricaGreat deal of sensitivity about SA dominanceMore high-level meetings on a functional levelJoint education and training programmes business skills improvedEncourage reputable SA companies to move into Botswana market

Joint industrialisation policies should be consideredSADC governments encouraged to use contractors from the regionEconomic relations should not be regarded as a zero-sum game

Key FindingsSmall, landlocked economy such as Botswana very vulnerable to developments in the region closer relationship with SA necessaryDespite strong economic growth since independence, not significant increase in jobs (sound macro-economic environment, less successful micro-economic environment) More cost sharing mechanisms requiredSkills important to address diversification Quality of investment outside mining disappointing (faces constraints typical of many African countries, not integrated into global production hubs)Goal set to reduce number of people living in poverty to zero by 2016 (requires investment of 41% of GDP per annum)Deserves credit for integrated, long-term vision for its society and economy.

Thank you Neuma GrobbelaarHead Business in Africa Research project

Contact details:grobbelaarn@saiia.wits.ac.za