‘‘Africa’s First Welfare Africa’s First Welfare State’State’

The Experience of South African Firms The Experience of South African Firms

Doing Business in BotswanaDoing Business in Botswana

South African Institute of South African Institute of International AffairsInternational Affairs

17 May 200517 May 2005

22

Outline Outline

MethodologyMethodology Key economic data Key economic data SA trade and investment linkages with SA trade and investment linkages with

BotswanaBotswana Results of SAIIA surveyResults of SAIIA survey Impact of SA business presence/FDI Impact of SA business presence/FDI Policy recommendationsPolicy recommendations Key findingsKey findings

33

MethodologyMethodology

Qualitative and quantative in-country Qualitative and quantative in-country survey of SA companies in Botswanasurvey of SA companies in Botswana

Representative sample group – every Representative sample group – every sector sector

Interviews with gov departments, Interviews with gov departments, academics, donor agencies, development academics, donor agencies, development bodies, private sector institutionsbodies, private sector institutions

Data from companies supplemented by Data from companies supplemented by BIDPA, BOB, BEDIA, MFDP, UNCTAD and BIDPA, BOB, BEDIA, MFDP, UNCTAD and othersothers

44

Socio-Economic Snapshot Socio-Economic Snapshot 2002 2002

PopulationPopulation 1.7 m1.7 m

GDPGDP $7bn$7bn

GDP growthGDP growth 3.1%3.1%

GNI per capitaGNI per capita $3,010$3,010

InflationInflation 8%8%

Foreign reservesForeign reserves $5.4bn$5.4bn

Gross savings/GDPGross savings/GDP 38.5%38.5%

External debtExternal debt $480m$480m

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GDP by Economic GDP by Economic activityactivityActivityActivity 19661966 1975/761975/76 2000/012000/01

AgricultureAgriculture 42.742.7%%

20.7%20.7% 2.6%2.6%

MiningMining -- 17.5%17.5% 36.5%36.5%

ManufacturingManufacturing 5.7%5.7% 7.6%7.6% 4.1%4.1%

Water/Water/ElectricityElectricity

0.6%0.6% 2.3%2.3% 2.4%2.4%

ConstructionConstruction 7.8%7.8% 12.8%12.8% 5.8%5.8%

Trade, hotelsTrade, hotels 9.0%9.0% 8.6%8.6% 10.3%10.3%

TransportTransport 4.3%4.3% 1.1%1.1% 3.8%3.8%

BankingBanking 20.120.1%%

4.7%4.7% 10.9%10.9%

Social servicesSocial services - - 2.8%2.8% 4.0%4.0%

GovernmentGovernment 9.8%9.8% 14.6%14.6% 16.0%16.0%

GDP growthGDP growth -- 18.4%18.4% 8.4%8.4%

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Sectoral breakdown of Sectoral breakdown of GDP, 2003GDP, 2003

17%

4%

3%

34%5%

3%

6%

9%

4%

3%

12% Government

Social and Pension services

Agriculture

Mining

Manufacturing

Water and Electricity

Construction

Trade

Transport

Hotels and Restaurants

Banks and Business services

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

RevenuesRevenues 1997/81997/8 2002/32002/3 % share % share

MineralsMinerals 3,6273,627 6,9866,986 55.3%55.3%

MineralsMinerals 4,6814,681 7,0407,040 53.7%53.7%

SACUSACU 1,1631,163 1,1121,112 11.6%11.6%

SACUSACU 1,1861,186 1,5541,554 14.3%14.3%

BOBBOB 1,7511,751 9,4279,427 16.3%16.3%

BOBBOB 947947 6,8486,848 9.9%9.9%

Other TaxesOther Taxes 1,2741,274 9,6909,690 16.8%16.8%

Other Other TaxesTaxes

1,4671,467 15,62615,626 22.7%22.7%

TotalTotal 7,8157,815 57,81657,816 100%100%

TotalTotal 8,2818,281 69,17069,170 100%100%

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Total number of employees by Total number of employees by sector, BOBsector, BOB

SectorSector 19951995 20012001AgricultureAgriculture 4,4674,467 5,9975,997

Mining Mining 8,4088,408 8,2528,252

ManufacturingManufacturing 23,38123,381 30,87430,874

Electricity/waterElectricity/water 2,5942,594 2,8612,861

ConstructionConstruction 22,08422,084 28,47028,470

CommerceCommerce 44,94444,944 49,90449,904

Transport/CommunicationsTransport/Communications 9,0069,006 10,12010,120

FinanceFinance 17,45217,452 19,17719,177

Community/Personal Community/Personal ServicesServices

10,09710,097 4,2384,238

EducationEducation 3,6083,608 6,4806,480

Central GovernmentCentral Government 69,42669,426 85,35485,354

Local GovernmentLocal Government 15,92115,921 21,04021,040

TotalTotal 231,387231,387 272,812272,812

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Is Botswana facing a new Is Botswana facing a new economic paradigm?economic paradigm?

Far-sighted use of foreign reserves: free education, Far-sighted use of foreign reserves: free education, health services, housing, entrepreneurship (40% of health services, housing, entrepreneurship (40% of budget on social development and reaches 40% of budget on social development and reaches 40% of population) – 90% of development funds provided by population) – 90% of development funds provided by Botswana government (cumulative development Botswana government (cumulative development spending 70% higher than initially envisaged) spending 70% higher than initially envisaged)

Presented a budget deficit in 1998/99, after 16 years of Presented a budget deficit in 1998/99, after 16 years of operating a budget surplus (last budget deficit 1982/83)operating a budget surplus (last budget deficit 1982/83)

Slowdown compounded by: global economic downturn Slowdown compounded by: global economic downturn after 2001, diamond production has peaked, foot & after 2001, diamond production has peaked, foot & mouth disease, HIV/Aids, drought, Zimbabwe crisismouth disease, HIV/Aids, drought, Zimbabwe crisis

Vision 2016: eradicate absolute poverty – requires Vision 2016: eradicate absolute poverty – requires growth of 8% (instead 4 - 5% expected)growth of 8% (instead 4 - 5% expected)

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Trade and investment Trade and investment linkages: SA and linkages: SA and

BotswanaBotswana Shared cultural and colonial history –

familiar, operating environment

Pragmatic political stance

Defining feature of South Africa’s economic relationship with Botswana is SACU

SA is Botswana’s largest import partner, whereas majority of Botswana’s 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.

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Botswana’s trade Botswana’s trade partners, 2001, BOBpartners, 2001, BOB

RegionRegion ExportExportss

ImportsImports

SACUSACU 6.5%6.5% 77.6%77.6%

ZimbabweZimbabwe 2.6%2.6% 3.2%3.2%

Other AfricaOther Africa 1.1%1.1% 0.3%0.3%

EUEU 79.1%79.1% 12.3%12.3%

USUS 1.0%1.0% 1.8%1.8%

OtherOther 0.2%0.2% 4.5%4.5%

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Investment by Source, Investment by Source, 2000, BOB2000, BOB

CountryCountry FDI %FDI %South AfricaSouth Africa 60.9%60.9%

LuxembourgLuxembourg 25.2%25.2%

UKUK 9.9%9.9%

USUS 1%1%

Middle East Middle East 1%1%

1313

Value of Investment by Value of Investment by country, Pmcountry, Pm

CountryCountry 19971997 19981998 19991999 20002000 20012001 20022002

RSARSA 3,3113,311 3,8713,871 3,9403,940 6,5726,572 6,8296,829 5,4235,423

LuxbrgLuxbrg 1,3311,331 2,0102,010 2,2622,262 2,5612,561 3,0813,081 3,3563,356

UKUK 118118 113113 1,3031,303 1,1111,111 814814 673673

GermanGermanyy

616616 761761 859859 1,2081,208 1818 181181

JapanJapan 224224 306306 196196 7474 549549 851851

USUS 448448 465465 226226 340340 385385 3232

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Investment by Sector, Investment by Sector, 2000, BOB2000, BOBSectorSector FDI %FDI % Other %Other %

MiningMining 79.3%79.3% 28.6%28.6%

ManufacturingManufacturing 3.5%3.5% 4.9%4.9%

FinanceFinance 6.3%6.3% 2.9%2.9%

Retail Retail 7.9%7.9% 2.0%2.0%

ElectricityElectricity 00 8.4%8.4%

Property/FinanceProperty/Finance 1.6%1.6% 1.5%1.5%

TransportTransport 1.1%1.1% 2.7%2.7%

ConstructionConstruction 0.1%0.1% 0.5%0.5%

TourismTourism 0.2%0.2% N/aN/a

Public Public AdministrationAdministration

00 48.2%48.2%

OtherOther 00 0.3%0.3%

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FDI inflows: select SADC FDI inflows: select SADC countries, 1989 – 2002, countries, 1989 – 2002,

$m$mYearYear BotswanBotswan

aaNamibiNamibiaa

MozambiquMozambiquee

1989-1989-19941994

-29-29 7070 --

19951995 7070 153153 --

19961996 7070 129129 7272

19971997 100100 8484 6464

19981998 9090 7777 235235

19991999 3737 111111 385385

20002000 5454 153153 139139

20012001 2626 275275 255255

20022002 3737 181181 406406

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

CountryCountry PercentagePercentage

BotswanaBotswana 23%23%

South AfricaSouth Africa 42%42%

ZambiaZambia 74%74%

LesothoLesotho 36%36%

NamibiaNamibia 53%53%

SingaporeSingapore 97%97%

MalaysiaMalaysia 65%65%

IrelandIreland 51%51%

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Results of SAIIA SurveyResults of SAIIA Survey Many SA company involvement predate 1994 (attracted by Many SA company involvement predate 1994 (attracted by

generous incentives and political stability)generous incentives and political stability) Several companies settled so long – regard themselves as Several companies settled so long – regard themselves as

indigenous Botswana companiesindigenous Botswana companies Many newcomers in retail, franchise – highly visible – Many newcomers in retail, franchise – highly visible –

strongly associated with South Africa motivated by SACU strongly associated with South Africa motivated by SACU (duty free access), high disposable income, safe (duty free access), high disposable income, safe environment, geographical proximity, infrastructure, labourenvironment, geographical proximity, infrastructure, labour

Largest investment into mining, De Beers through Largest investment into mining, De Beers through Debswana (Orapa mine)Debswana (Orapa mine)

Dominant players in market: primarily Greenfield and Dominant players in market: primarily Greenfield and acquisitions, some joint venturesacquisitions, some joint ventures

98% of employees are locals (represented at every level)98% of employees are locals (represented at every level)

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Results cont. Results cont.

Business friendliness:Business friendliness: Very favourable (incentives for Very favourable (incentives for foreign-owned businesses, receptiveness of gov to foreign-owned businesses, receptiveness of gov to policy input, low corruption)policy input, low corruption)

FDI incentives: foreign exchange controls abolished in FDI incentives: foreign exchange controls abolished in 1999, corporate tax 15% (manufacturing companies 1999, corporate tax 15% (manufacturing companies + IFSC), no prohibitions on foreign ownership, + IFSC), no prohibitions on foreign ownership, maximum personal and marginal tax rate 25% maximum personal and marginal tax rate 25% (region’s average – 35%), VAT of 10% also lowest in (region’s average – 35%), VAT of 10% also lowest in SADCSADC

Private-public relations on sound footingPrivate-public relations on sound footing Strong confidence in the courtsStrong confidence in the courts Some companies that have been in Botswana over 15 Some companies that have been in Botswana over 15

years did complain about deteriorating business years did complain about deteriorating business morals morals

1919

Main constraintsMain constraints Dominant Dominant role of governmentrole of government indirectly flagged re indirectly flagged re

cost of utilities, unfair competition of parastatals, cost of utilities, unfair competition of parastatals, lack lustre performance outside mininglack lustre performance outside mining

High confidence in fiscal prudence and sound High confidence in fiscal prudence and sound management policy, as well as acknowledgement management policy, as well as acknowledgement of broader debate of role of governments in of broader debate of role of governments in developing societiesdeveloping societies

Market sizeMarket size most critical concern (high disposable most critical concern (high disposable income misleading – high inequality (24% under $1 income misleading – high inequality (24% under $1 a day, 50% under $2 a day), payment difficulties - a day, 50% under $2 a day), payment difficulties - highly indebted society, access to finance difficult highly indebted society, access to finance difficult (prime rate about 15%), still cash-driven economy(prime rate about 15%), still cash-driven economy

2020

Main constraints cont. Main constraints cont. Labour:Labour: Lack of skilled labour, biased towards British Lack of skilled labour, biased towards British

system, qualified unemployment, also result of rapid system, qualified unemployment, also result of rapid growth of economy and impact of HIV/Aids, growth of economy and impact of HIV/Aids, xenophobia (lowest ranking that Botswana has ever xenophobia (lowest ranking that Botswana has ever received from Africa Competitiveness Survey (20received from Africa Competitiveness Survey (20thth out out of 24of 24thth) in 2001 ) in 2001

Bureaucracy:Bureaucracy: slow processing of work permits slow processing of work permits Unfair competition:Unfair competition: Construction and property Construction and property

development (profit margins in infrastructure development (profit margins in infrastructure development slim, BOT projects rare)development slim, BOT projects rare)

Cost of utilities high:Cost of utilities high: Water and electricity (drives up Water and electricity (drives up manufacturing costs)manufacturing costs)

Constraints identified close correlation with WEF Constraints identified close correlation with WEF surveysurvey

2121

Impact of SA investmentImpact of SA investment SA investors have had considerable impact (early entry SA investors have had considerable impact (early entry

& number of companies), prudent management of & number of companies), prudent management of diamonds with De Beers laid foundation for economydiamonds with De Beers laid foundation for economy

Contributed to diversification of economy, employment Contributed to diversification of economy, employment creation, raised competitive levels, instill business creation, raised competitive levels, instill business culture, built local capacityculture, built local capacity

Make contributions to medical aid & pension funds, Make contributions to medical aid & pension funds, severance benefits, social programmesseverance benefits, social programmes

Some concern about ‘hegemonic’ influence of SA Some concern about ‘hegemonic’ influence of SA business (enforced huge trade imbalance, negligible business (enforced huge trade imbalance, negligible domestic linkages between two economies) domestic linkages between two economies)

SA retailers have taken advantage of building of several SA retailers have taken advantage of building of several malls (anchor tenants), however, sector is overtradedmalls (anchor tenants), however, sector is overtraded

2222

Impact cont. Impact cont. Despite encouragement to procure locally – most Despite encouragement to procure locally – most

companies procure from SAcompanies procure from SA Botswana suppliers complain retail sector uses country as a Botswana suppliers complain retail sector uses country as a

market for SA products, undermining local manufacturing market for SA products, undermining local manufacturing capacity, buying authorities located in SA, no trade-off capacity, buying authorities located in SA, no trade-off between two countriesbetween two countries

Many restaurant franchises catering for urban youth + Many restaurant franchises catering for urban youth + upwardly mobile middle class – viewed positively creating upwardly mobile middle class – viewed positively creating local employment, transfer business skills, ingredients local employment, transfer business skills, ingredients obtained locally (support agri sector)obtained locally (support agri sector)

Although SA most significant investor in Botswana, has not Although SA most significant investor in Botswana, has not fulfilled government’s employment targets, nor significant fulfilled government’s employment targets, nor significant impetus to improve local manufacturing impetus to improve local manufacturing

Some gov officials and academics expressed open Some gov officials and academics expressed open disappointment in quality of SA investmentdisappointment in quality of SA investment

2323

Negative impact of SA Negative impact of SA policies on Botswana’s policies on Botswana’s economic objectiveseconomic objectives

Survey found that many economic policies adopted Survey found that many economic policies adopted by the SAG to address local imbalances economy by the SAG to address local imbalances economy have unintended consequences in Botswanahave unintended consequences in Botswana

Examples: Failure of Hyundai Assembly plant in Examples: Failure of Hyundai Assembly plant in 2000, the EU TDCA, SA tax legislation on IFSC, 2000, the EU TDCA, SA tax legislation on IFSC, exchange rate volatility exchange rate volatility

In 2001 the SAG introduced new tax legislation In 2001 the SAG introduced new tax legislation requiring SA companies operating in foreign requiring SA companies operating in foreign countries that charged a lower tax rate then in SA to countries that charged a lower tax rate then in SA to pay additional taxes if it was less than 90% than the pay additional taxes if it was less than 90% than the SA rate – affected all SA companies operating in SA rate – affected all SA companies operating in BotswanaBotswana

Only addressed in 2003 when new double taxation Only addressed in 2003 when new double taxation agreement was concludedagreement was concluded

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Policy Policy Recommendations to Recommendations to

BotswanaBotswana- BEDIA to be BEDIA to be

strengthenedstrengthened- Appointment of Appointment of

foreign skilled workersforeign skilled workers- Utility costs to be Utility costs to be

brought downbrought down- Priority to Priority to

employment creationemployment creation- Stigma of HIV/Aids to Stigma of HIV/Aids to

be addressedbe addressed- Increase productivity Increase productivity

levelslevels

- Small business should Small business should receive priorityreceive priority

- Regulation (property Regulation (property and banking sector) and banking sector) strengthenedstrengthened

- Act more quickly on Act more quickly on issues raised by issues raised by private sectorprivate sector

- Exploit other Exploit other resources (gas, gold, resources (gas, gold, coal)coal)

2525

Policy Policy Recommendations to Recommendations to

South AfricaSouth Africa- Great deal of Great deal of

sensitivity about SA sensitivity about SA dominancedominance

- More high-level More high-level meetings on a meetings on a functional levelfunctional level

- Joint education and Joint education and training programmes – training programmes – business skills business skills improvedimproved

- Encourage reputable Encourage reputable SA companies to move SA companies to move into Botswana marketinto Botswana market

- Joint industrialisation Joint industrialisation policies should be policies should be consideredconsidered

- SADC governments SADC governments encouraged to use encouraged to use contractors from the contractors from the regionregion

- Economic relations Economic relations should not be should not be regarded as a zero-regarded as a zero-sum gamesum game

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Key FindingsKey Findings

Small, landlocked economy Small, landlocked economy such as Botswana very such as Botswana very vulnerable to developments vulnerable to developments in the region – closer in the region – closer relationship with SA relationship with SA necessarynecessary

Despite strong economic Despite strong economic growth since independence, growth since independence, not significant increase in not significant increase in jobs (sound macro-economic jobs (sound macro-economic environment, less environment, less successful micro-economic successful micro-economic environment) – More cost environment) – More cost sharing mechanisms sharing mechanisms requiredrequired

Skills important to address Skills important to address diversification diversification

Quality of investment Quality of investment outside mining outside mining disappointing (faces disappointing (faces constraints typical of many constraints typical of many African countries, not African countries, not integrated into global integrated into global production hubs)production hubs)

Goal set to reduce number Goal set to reduce number of people living in poverty of people living in poverty to zero by 2016 (requires to zero by 2016 (requires investment of 41% of GDP investment of 41% of GDP per annum)per annum)

Deserves credit for Deserves credit for integrated, long-term integrated, long-term vision for its society and vision for its society and economy. economy.

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Thank you Thank you

Neuma GrobbelaarNeuma Grobbelaar

Head Business in Africa Research Head Business in Africa Research projectproject

Contact details:Contact details:

grobbelaarn@saiia.wits.ac.zagrobbelaarn@saiia.wits.ac.za