‘Africa’s First Welfare State’ The Experience of South African Firms Doing Business in Botswana

1. ‘Africa’s First Welfare State’The Experience of South African Firms Doing Business in Botswana South African Institute of International Affairs 17 May 2005

2. Outline • Methodology • Key economic data • SA trade and investment linkages with Botswana • Results of SAIIA survey • Impact of SA business presence/FDI • Policy recommendations • Key findings

3. Methodology • Qualitative and quantative in-country survey of SA companies in Botswana • Representative sample group – every sector • Interviews with gov departments, academics, donor agencies, development bodies, private sector institutions • Data from companies supplemented by BIDPA, BOB, BEDIA, MFDP, UNCTAD and others

4. Socio-Economic Snapshot 2002

5. GDP by Economic activity

6. Sectoral breakdown of GDP, 2003

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

8. Total number of employees by sector, BOB

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

10. Trade and investment linkages: SA and Botswana • 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.

11. Botswana’s trade partners, 2001, BOB

12. Investment by Source, 2000, BOB

13. Value of Investment by country, Pm

14. Investment by Sector, 2000, BOB

15. FDI inflows: select SADC countries, 1989 – 2002, $m

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

17. Results of SAIIA Survey • Many SA company involvement predate 1994 (attracted by generous incentives and political stability) • Several companies settled so long – regard themselves as indigenous Botswana companies • Many 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, labour • Largest investment into mining, De Beers through Debswana (Orapa mine) • Dominant players in market: primarily Greenfield and acquisitions, some joint ventures • 98% of employees are locals (represented at every level)

18. 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% (region’s average – 35%), VAT of 10% also lowest in SADC • Private-public relations on sound footing • Strong confidence in the courts • Some companies that have been in Botswana over 15 years did complain about deteriorating business morals

19. Main constraints • Dominant role of government indirectly flagged re cost of utilities, unfair competition of parastatals, lack lustre performance outside mining • High confidence in fiscal prudence and sound management policy, as well as acknowledgement of broader debate of role of governments in developing societies • Market 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

20. 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 permits • Unfair 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

21. Impact of SA investment • SA investors have had considerable impact (early entry & number of companies), prudent management of diamonds with De Beers laid foundation for economy • Contributed to diversification of economy, employment creation, raised competitive levels, instill business culture, built local capacity • Make contributions to medical aid & pension funds, severance benefits, social programmes • Some 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

22. Impact cont. • Despite encouragement to procure locally – most companies procure from SA • Botswana 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 countries • Many 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 government’s employment targets, nor significant impetus to improve local manufacturing • Some gov officials and academics expressed open disappointment in quality of SA investment

23. Negative impact of SA policies on Botswana’s economic objectives • Survey found that many economic policies adopted by the SAG to address local imbalances economy have unintended consequences in Botswana • Examples: 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 Botswana • Only addressed in 2003 when new double taxation agreement was concluded

24. BEDIA to be strengthened Appointment of foreign skilled workers Utility costs to be brought down Priority to employment creation Stigma of HIV/Aids to be addressed Increase productivity levels Small business should receive priority Regulation (property and banking sector) strengthened Act more quickly on issues raised by private sector Exploit other resources (gas, gold, coal) Policy Recommendations to Botswana

25. Great deal of sensitivity about SA dominance More high-level meetings on a functional level Joint education and training programmes – business skills improved Encourage reputable SA companies to move into Botswana market Joint industrialisation policies should be considered SADC governments encouraged to use contractors from the region Economic relations should not be regarded as a zero-sum game Policy Recommendations to South Africa

26. Small, landlocked economy such as Botswana very vulnerable to developments in the region – closer relationship with SA necessary Despite strong economic growth since independence, not significant increase in jobs (sound macro-economic environment, less successful micro-economic environment) – More cost sharing mechanisms required Skills 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. Key Findings

27. Thank you • Neuma Grobbelaar Head Business in Africa Research project Contact details: grobbelaarn@saiia.wits.ac.za