1
Africas First Welfare StateThe 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

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Socio-Economic Snapshot 2002
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GDP by Economic activity
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Sectoral breakdown of GDP, 2003
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NDP8 Gov budget Review(Estimates and Actual, P m)
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Total number of employees by sector, BOB
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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)

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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.

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Botswanas trade partners, 2001, BOB
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Investment by Source, 2000, BOB
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Value of Investment by country, Pm
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Investment by Sector, 2000, BOB
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FDI inflows select SADC countries, 1989 2002,
m
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Comparison FDI Stock as of GDP, 1999, UNCTAD
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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)

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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 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

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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

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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

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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

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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 governments
  employment targets, nor significant impetus to
  improve local manufacturing
• Some gov officials and academics expressed open
  disappointment in quality of SA investment

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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 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

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Policy Recommendations to Botswana

• 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)

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Policy Recommendations to South Africa

• 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

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Key Findings

• 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.

• 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

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Thank you

• Neuma Grobbelaar
• Head Business in Africa Research project
• Contact details
• grobbelaarn_at_saiia.wits.ac.za