After making the difficult compromise of allowing more US poultry into South Africa to ensure the renewal of AGOA (African Growth and Opportunity Act), why would South Africa now jeopardise that renewal by introducing foreign ownership restrictions by signing the Private Security Industry Regulatory Amendment Act into law?
This is a question raised by Sarah Truen, a Senior Economist at independent consulting firm DNA Economics. She was commenting on the release of the firm’s report which analysed the likely costs of implementation of clause 20(d) of PSIRA which will force foreign owned private security firms to sell at least 51% of their businesses to South Africans.
The Act is with the President awaiting signature. The report was commissioned by the Security Industry Alliance, which represents the interests of both local and international private security companies in South Africa.
One of the elements the report examined was the value at risk in respect of international trade agreements. One of the key agreements at risk is AGOA, which has just been renewed by the US Senate. This trade agreement has been estimated by the DTI itself as being extremely valuable to the domestic economy, allowing 27% of South African goods exported to the US to enter duty free, which was estimated to add 2.78% to South African manufacturing GDP and 11% to manufacturing employment in 2010.
Truen says, “Restricted access to the SA market for American poultry producers was a stumbling block in AGOA’s renewal but SA compromised by allowing greater access for US chicken producers to ensure that renewal occurred, even though an impact on local production is expected. DTI made this difficult choice because AGOA as a whole is perceived to be so valuable to the SA economy. However, this compromise may have been in vain if the issues in the security industry legislation are not addressed.
“The current version of AGOA now includes an out-of-cycle review provision, which allows the US President to terminate or suspend the AGOA membership of any country which is found to be in contravention of the AGOA Act. The elimination of trade barriers is one of the specific requirements for access to AGOA, and the US has already expressed concerns about the foreign ownership restriction in PSIRA. Enactment of clause 20(d) of PSIRA would thus likely be sufficient to cause SA to fail an out-of-cycle review, and lose access to AGOA.
“Restrictions on foreign ownership such as those proposed in PSIRA will impose a real cost on the South African economy. Closed, autarkic economies are known to perform worse than open economies. In a global economy, countries need to be open and friendly to international investors. North Korea is an extreme example of an autarkic state but it illustrates the disastrous consequences of this kind of national economic self-sufficiency.”
In addition to the economic impact via trade in services, the DNA Economics report examined the role foreign owned private security firms play in the wider SA security environment, risk to investor value and the impact on the equipment manufacturing industry.
Risk to value
The report found that the proposed amendment would result in substantial risk to the value of the international firms currently operating in South Africa (ADT, Chubb, G4S, Securitas and major multi-national companies that supply, manufacture, install and distribute equipment to the private security industry).
Truen says, “Where the parent company is uncomfortable with holding only a minority share, which is likely where brand identity and intellectual property are at stake, they would divest of their entire local stake. Furthermore, it would result in the foreign owned firms all having to simultaneously go to the market, with local investors having the ability to shop around and drive the cost of assets down. Because these firms will either partially or entirely lose the technical, strategic and financial support of their parent company, they will also lose real value. The net effect will be that assets will be sold at below their true value, to the detriment of investors.
“But, the greater cost is likely to come in the form of reduced incentives for international firms to invest both in the private security industry and other sectors out of fear of an increased risk of expropriation in the economy.”
Truen also says the reduction in company value may seem to benefit local players but it will negatively impact customers.
“The proposed amendments will require investors to sell their assets, which may result in industry consolidation, and will raise industry entry barriers, both of which will tend to local competition. Less competition is in turn likely to result in higher prices and less effort to continuously improve service quality.”
Crime related costs
In its analysis, DNA Economics found that there may be substantial crime related costs as a result of the implementation of the foreign ownership restrictions. Private security firms act as a complement to SAPS, and fulfil a different role to the police. Foreign owned private security firms help to implement international best practices in security services locally, and ensure that the private security business is optimally placed to mitigate against the effects of crime as much as possible.
Truen says the proposed legislation will undermine these knowledge transfers, and reduce the deterrence effect of the industry on crime levels.
“Furthermore, foreign ownership has played a substantive role in the ability of the industry to tackle cash-in-transit crime. This has been felt both because of the transfer of international best practice from international shareholders, and also because of the enhanced ability of large multinationals to offer financial guarantees against losses. A reduction in the ability of banks to access adequate guarantees against cash losses may be a material effect of the proposed legislation.”
Equipment manufacturers
The proposed amendments to the Act will also include multi-national companies that supply, manufacture, install and distribute equipment to the private security industry.
The report highlights the effect of the amendments on foreign-owned private security equipment manufacturers operating and active within SA.
Truen says, like security firms, equipment manufacturers are likely to disinvest rather than lose control of their brand locally.
Products will thus be supplied in SA through agencies rather than directly through the manufacturer, which will result in an immediate decrease in the level of client support provided, as well as a reduced ability to customise equipment to suit client needs, and a reduction in the availability of spare parts and system expansions. The foreign-owned entities active which may be affected include, but are not limited to Bosch, Sony, Apple, Samsung, Panasonic and even listed local firms with majority foreign shareholding such as Bidvest.
The most astute economic decision would be to remove Section 20(d)
The process of developing policy and legislation can introduce significant uncertainties into the economic environment. It is essential that the costs and benefits of legislative changes are examined before they are implemented, as unintended consequences can have disastrous impacts on economic outcomes, which often cannot be easily unravelled.
The economic cost implications for Section 20(d) are substantial, and arise in a number of areas. Some of the most likely and possibly also most substantial of these costs would be triggered by a destabilisation of our relationships with important trading partners such as the US and the EU, and the trade litigation and loss of trade in services liberalisation benefits which would result.
It is difficult to see how the proposed amendment could generate benefits sufficient to outweigh these costs, particularly given the strict regulations on the employment of foreign nationals in private security that are already in place.
In contrast, the removal of clause 20(d) would send an important signal to our trading partners that South Africa intends to honour its trade commitments, and remains supportive of the private property rights of international investors. Our international trade position is of importance both to the achievement of South Africa’s longer term growth objectives, and as a short term priority given the current deterioration in our trade position.
The removal of clause 20(d) would thus be the correct strategic decision for the wider economy as well as the sector.
© Technews Publishing (Pty) Ltd. | All Rights Reserved.
printer friendly version