South Africa's ranking in the Doing Business Report exposes challenges for investment.
The World Bank’s Doing Business Report, the organisation’s annual indicator of the ease of doing business in various economies around the world, ranked South Africa 73rd in 2015, a fall of four places from the previous year. Although it was ranked in the top 25% of economies in three indicators (resolving insolvency-related issues, paying taxes and protecting minority investors) South Africa did not perform well in the remaining seven indicators, with access to electricity the worst performing indicator.
In addition to the full report, which presents data for 189 economies and aggregates information from ten areas of business regulation (such as starting a business, getting credit and enforcing contracts), to develop an overall ‘ease of doing business’ ranking for each economy, The World Bank has also produced a South African Economy Profile Report.
These results do seem to reflect the difficulties investors are currently experiencing when doing business in South Africa.
A case in point can be found in South Africa’s renewable energy IPP market. Press reports on 9 October 2015 confirmed that Eskom had decided not to issue any further budget quotes. The budget quote is a prerequisite for IPP grid connections and for achieving financial close on a renewable energy project, so progress on all projects heading for financial close ground to a halt. Despite the fact that Eskom has since indicated it will resume issuing budget quotes, these events illustrate the potential impact of unforeseen and unexpected action on the part of government and state-owned entities and the volatility of the investment climate in South Africa.
Despite the business challenges, the Minister of Energy announced on 8 June 2015 that private sector investment in South African renewable energy generation now exceeds ZAR193 billion (roughly US$14.3 billion). Apart from one or two delays along the way, the South African Renewable Energy Independent Power Producer Procurement Programme (the REIPPP programme) is generally regarded internationally as a good example of a competitive reverse auction procurement programme working successfully to create a competitive market for IPP investment which has significantly driven down the MW/hr renewable energy tariffs over the last four years.
At the 9th Annual Powering Africa Conference held in Cape Town on 5 – 6 November 2015, the Department of Energy confirmed that 3125MW will be allocated under an expedited gas to power procurement programme which could be rolled out as early as next year, to be followed by a longer-term programme, widely expected to be on a larger scale than the REIPPP programme.
In this context government is revamping the procurement process and there are some lessons that could be drawn from the REIPPP and other programmes:
- Adherence by all stakeholders to the deadlines set by government must be part of the programme. Local and international businesses spend considerable funds to prepare projects for bid submission and to reach financial close. Shifting goal posts increases this spend dramatically.
- Clear and practical economic development obligations are required. At the Powering Africa conference, for example, concerns were expressed by business about the 51% BEE ownership included in the Coal RFP. Although there is overwhelming support for the government’s empowerment initiatives, business will need some guidance on how to achieve targets and legal counsel is expected to develop appropriate structures to promote economic empowerment in a sustainable way.
These suggestions would be relatively easy and cost effective for government to implement and could make a large difference in investor confidence in the stability of the South African market.
The Inside Africa team would like to thank Tammy-Lynne Bekker, Candidate Attorney, for her contribution to this blog post.