Critics of the private business sector in SA allege that local companies are on an "investment strike".

CRITICS of the private business sector in SA allege that local companies are on an "investment strike". To substantiate this, they point to data suggesting that companies’ bank deposits are rising rapidly. This, they argue, proves that South African companies choose to hoard cash instead of investing in expanded production.

Such criticism is ill-founded. It fails to recognise that bank deposits are not idle money. Such deposits are redirected through the banking system to borrowers. Often they are used by the depositing companies themselves to fund their own investments.

For a number of reasons, South African companies choose to fund only part of their new investments by bank borrowings. They fund the remainder from retained profits. As a result, company bank deposits and corporate bank borrowings are both rising simultaneously. Both sources of investment funding are important.

Retained earnings by companies make up the bulk of our country’s savings, yet despite this we save less than we invest as a nation. This means we have to run exceptionally large deficits on the current account of our balance of payments with the rest of the world — deficits that must be funded by inflows of foreign capital. These would be larger were it not for corporate savings.

Claims of an investment "strike" assume that the present policy environment encourages investment, but companies refuse to take advantage of the opportunities available to them. This is doubtful.

It is unlikely that attractive new investment opportunities will have emerged in a South African economy that since 2008 has grown only sluggishly. Moreover, government policy is often openly hostile to private investment.

For example, there is a clear need for substantial new investments in electricity generation. Private companies have demonstrated their eagerness to help create this new capacity by swiftly constructing wind farms and solar energy generation when they have been allowed to.

But the government continues to look to power utility Eskom for the bulk of the needed new investments — despite its obvious inability to provide such supply timeously, or within acceptable costs. Thus, despite capacity shortages and the resultant load shedding, the government has delayed announcing the successful bidders in the fourth phase of licensing private electricity generation projects because Eskom failed to budget to connect such projects to the national grid.

In so doing, it has chosen to place on hold private investors with proven success in bringing new capacity rapidly on stream.

Critically needed investment in generation capacity is being delayed, not by private sector unwillingness, but by the government’s desire to mollycoddle an inefficient public monopoly.

In an economy growing as slowly as ours, most new investment will be in industries that export to foreign markets, where demand is growing more rapidly. But this is not happening because most South African exports are energy intensive and related to mining, where expansion is handicapped by the lack of power supply.

Expansion of mining production is further discouraged by proposed legislation that will intentionally reduce the price miners receive for their exports and possibly also restrict the volumes they can export. There are many more examples where government actions are perceived negatively by private investors.

The government has chosen, for instance, to ignore repeated warnings by foreign businesses that they view in a very negative light the scrapping by SA of the foreign investment guarantees in our international trade treaties.

Given all these negatives, it is perhaps surprising that private investment is not lower than its present 13% of gross domestic product. This level is actually quite high by our standards.

In the past 30 years, it was higher only from 2005-08 — when the economy was growing 5% a year.

For the economy to grow sustainably and more rapidly, we need much more private investment. So the sooner we acknowledge that our present policy environment fails to address investor concerns or promote investor confidence, the better.

Pretending otherwise only guarantees continued sluggish economic growth and joblessness. Nervous investors need to be romanced not repulsed by misplaced criticism and foolish policy.

Article by : Gavin Keeton.

Article source : Business Day.