# Regulatory Compliance Category > BEE and Employment Equity Forum >  Foreign Investment and BEE/Employment Equity (actual 25% req and directorships)

## cyppok

I am sorry I simply don't get how this doesn't kill any incentive by foreigners to invest.
You buy a company (that has more than R35m($4.5 mil dollars or so I figure) in revenue and now you have to give
1) board seats
2) 25% of the company to someone? wtf
3) 50.1% of management? they want control without paying for it or what?
and employment equity? is it like profit sharing you have to give 40-70% of profits to employees in addition
to giving up share equity AND management control?

or do they get exemptions? like Walmart etc...

My guess is all of these wonderful companies like Walmart simply lean on our wonderful U.S. gov't to nudge SA to lay off and they are quasi-exempt. Perhaps I am wrong... there is "expropriation" insurance that is provided by opic.gov US overseas investment arm and it is most likely their biggest seller. 

Without getting exemptions to that crap it seems absurd most likely outcome is there are large bribes to get AAA "compliance" or whatever it is that says you're ok. Its' all arbitrary anyway so they simply get suitcases of money and the file is 'stamped'...

Otherwise there is no point investing or buying a corporation to do capital investment or expand in SA if you have to comply with that as a big company.

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## cyppok

Ok I am officially an idiot the system is designed to be gamed from outside by insiders.

http://www.investmentincentives.co.z...small-industry

Technically with funding from Opic(or some other govt overseas investment program I am sure there are in Canada or UK that provide grants to African projects)
 (if you could get it as a grant and an additional grant from SA gov't you could actually do very well)

Might make sense to go to SA for people. If they have money they could put in $1 get $6 from grants (assuming 30% from SA and 30% from Home Overseas) and get subsidized foreign guaranteed loan for the rest. Perhaps 1 to 9 leverage... with 7/9ths being your equity and actual leverage only 2/9ths. I am sure there is some way to get the rest to have all equity or even borrow to get your investment out before the project is even done. 

There is a bifurcation that happens in things like this I think. 
1) You incentivize for people to sell and leave at inflated prices and others to buy at said prices.
2) Outcome independence creates a lot of leeway for people to focus on short term extraction and abandonment at the least adversarial taking by the government.

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## Dave A

> the system is designed to be gamed from outside by insiders.


You're probably right on the money  :Stick Out Tongue: 

If you're curious, we actually discussed the Walmart purchase of Massmart here. The conditions imposed on the deal came up on page 2.

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## cyppok

Made this thread basically from my own viewpoint.

Ergo from a foreign perspective investing in South Africa to buy a whole company (not 51% or so like Walmart did where BEE was I guess already in place) it makes no sense.

It does to a degree look like any foreigner has to give a 25% peace of the pie to favored people just because the government says so. To me as an outsider it seems absurd. Capital investment under those circumstances where you pay 100% of the cost get 70-75% of the benefit (at best if you discount other compliance)
then have to pay 40% tax rates seems absurd. The return on investment and capital would have to be quiet high.
I am sure it will still happen, but the pace of foreign investment will be very low or carve out their positions to skirt paying the full freight. 

5 million rand is not indexed so with each year it becomes smaller and smaller REAL number. At some point everyone has to get out if inflation goes fast enough. 

I FIGURED IT OUT, in order to escape BEE you just have to become black like Michael Jackson became white. So you go get your surgery and ipso facto you are now exempt from BEE. Right? :Bananadance:  { I wonder do they give you a subsidy for the surgery now, hmm. }
(I am kidding btw)

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## Blurock

Not quite true. The tax rate for companies is 28% and not 40% (that is the max for private tax). There are many tax incentives and a number of concession are being made for foreign investors. 

You also do not have to give away 51% of your company. We are not Zimbabwe. A lot depends on job creation and the strategic impact of the business. Ford and GM are US companies operating in South Africa. They do not have 51% black ownership, but they promote BEE procurement and assist with skills transfer.

In other words, do we need your product, or are you just another opportunist adding no value? In that case you should have a BEE partner to get you the business. :Smile:

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## cyppok

> Not quite true. The tax rate for companies is 28% and not 40% (that is the max for private tax). There are many tax incentives and a number of concession are being made for foreign investors. 
> 
> You also do not have to give away 51% of your company. We are not Zimbabwe. A lot depends on job creation and the strategic impact of the business. Ford and GM are US companies operating in South Africa. They do not have 51% black ownership, but they promote BEE procurement and assist with skills transfer.
> 
> In other words, do we need your product, or are you just another opportunist adding no value? In that case you should have a BEE partner to get you the business.


You are right just checked it but the individual rate plays into it as well granted in the US its similar however the risk profile is not the same.

I didn't say you had to give 51% I said Walmart bought that much because if they bought 100% they would have to give up 25% for free. Ford and GM seems to have gotten an exemption from giving up 25% of equity in subsidiaries they invested in and staffed.

What I meant was that at 100% investment for someone in a different industry the risk profile becomes a bit absurd.
You in essence pay 100 for 75 since you have to give up 25. 
*I rather not have BEE partner and simply go to a different country.* That was my point from foreign point of view. All people are opportunists, but say if I was to grow almonds and sell em to the States why should I share my equity? why not simply go to Australia instead (they grow nuts there too for export). I am sure its hard enough operating a business without some gov't azhole making extra hoops for you to jump through and then on top of it mandate you take his kin as a partner to boot.

I am sure the prices for land will be different but overall (since trees take a while to grow to the stage where the nuts are harvestable its less than the equity being given up.

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## Blurock

There's always an opportunity somewhere. Just do not get Govt as a business partner. The upside may be additional orders if they are not sleeping, but the downside is having to wait for a board meeting before you may spend money to pay for emergency repairs on a critical machine or process. People in government never seem to be able to grasp the urgency of a situation, even if the place is falling apart.  :Crazy:

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## cyppok

> There's always an opportunity somewhere. Just do not get Govt as a business partner. The upside may be additional orders if they are not sleeping, but the downside is having to wait for a board meeting before you may spend money to pay for emergency repairs on a critical machine or process. People in government never seem to be able to grasp the urgency of a situation, even if the place is falling apart.


http://www.bdlive.co.za/businesstime...ion-lock-horns
This was just too "good" to not post, story is from 09/23/2012 (I posted the top and little from the middle of the article)




> European Union officials and business leaders are "disappointed" and "very concerned" about South Africa's decision to cancel investment protection agreements with the EU, the source of more than 80% of foreign direct investment in South Africa.
> 
> Last week South Africa terminated an investment treaty with Belgium and Luxembourg when it expired. In total, South Africa has 13 agreements with EU member states, which will all be cancelled as they come up for renewal.
> 
> Existing investments will enjoy the same protection for a sunset period of 10 years, but new investments will not be covered by the agreements, which guarantee compensation should expropriation or damage be suffered by investors.
> 
> "South Africa's timing couldn't be worse in the light of the Marikana situation. Also, one cannot help but wonder whether these agreements are being cancelled in case South Africa decides to nationalise certain key sectors in the economy," one European businessman said on the sidelines of the SA/EU summit in Brussels this week.





> South Africa has been reviewing its investment protection framework and a new regime is likely to take the form of legislation, which should be in place in less than five years, Davies said.
> 
> The review was sparked by a long-running lawsuit brought by Italian mining investors in 2006.
> 
> They argued that a new mining law, which requires 26% black ownership, caused damage to their investment and that they should be paid compensation in terms of investment treaties between South Africa, Italy and Luxembourg. The case was settled in 2010.



http://www.neurope.eu/article/250-million-pledged-south-african-development
Story from Sep 19th from the bottom excerpt.




> The EU also reported its decision to run a €250 million programme aiming to support South Africa’s National Development Policy.
> 
> The EU is South Africa’s main trading partner receiving 30% of total exports. It is also the primary foreign investor with 77.5% of Foreign Direct Investment and it provides 70% of all country’s external assistance. Both parties have signed a joint country strategy paper (CSP) defining their cooperation in terms of development over the period 2007-13, with the main purpose to reduce poverty and inequality and to promote social stability and environmental sustainability in South Africa.


Couldn't resist posting the second story. I just find it too funny, in a cynical gloating absurd kind of way.

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## Dave A

To put the % FDI in perspective, all the multinationals I know and deal with trade into Africa via their European office. So a pretty big chunk of that isn't really "Europe" making the decision - they're just the medium.

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## cyppok

> To put the % FDI in perspective, all the multinationals I know and deal with trade into Africa via their European office. So a pretty big chunk of that isn't really "Europe" making the decision - they're just the medium.


Incentives matter still. Watched listened to http://csis.org/multimedia/video-fos...estment-africa they touched on BEE very briefly in essence saying it worked out somewhat differently than expected enriching the few instead of making the country feel like the investments are a partnerships to involve people. 
http://csis.org/region/africa

http://www.heritage.org/search?query=south+africa
There will be some nudging this is from last year. http://www.heritage.org/research/rep...onomic-freedom



> The U.S. government can and should use the wide variety of available political and economic diplomacy policy instrumentse.g., the U.S.South Africa Strategic Dialogue, the U.S.South Africa Trade and Investment Framework Agreement (TIFA) Council, and the extension of textile provisions in 2012 and eventual renewal in 2015 of the African Growth and Opportunity Act (AGOA)to encourage and incentivize the South African government to make the difficult structural reforms and policy changes that are needed to set South Africa firmly on the road to economic prosperity.


There is leverage not sure if it will ever be used.

You may be right on some of it being from/to elsewhere to shift it sometimes if the regimes of import/export is favorably set. 

Wondering how your property bubble unfolds ours is slowly persisting downward and Canada is just beginning to realize it. Sweden is in full reality (almost) but still holding on. Ukraine is slowly imploding but also very tightly holding up asset prices.

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## Citizen X

> There's always an opportunity somewhere. Just do not get Govt as a business partner. The upside may be additional orders if they are not sleeping, but the downside is having to wait for a board meeting before you may spend money to pay for emergency repairs on a critical machine or process. People in government never seem to be able to grasp the urgency of a situation, even if the place is falling apart.


Blurock, I agree with you 100%!Well, under the auspices of urgent meeting, you could use the blue light brigade to ride some innocent character over! :Rant1: 
The Government as a Business partner, wow, what a partnership, what a business success model! The product costs R10 wholesale, you give a tender to some character who has know experience in that sector whatsoever, he then sub contracts, you eventually pay R100 for the very same product in the name of openness and transparency...

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## Dave A

> they touched on BEE very briefly in essence saying it worked out somewhat differently than expected enriching the few instead of making the country feel like the investments are a partnerships to involve people.


True, although in hindsight I'm not sure whether it's a case of " somewhat differently than expected" or "somewhat differently than advertised". 

There is one other core concept of the policy that also hasn't worked out as advertised too; that the goaled changes in demographics would be achieved by growth of the total market rather than redistribution.




> Wondering how your property bubble unfolds


I think we're pretty locked in to current levels. My description of the SA property market at the moment would be "subdued, but stable."

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## cyppok

http://mg.co.za/article/2012-09-28-0...urity-industry




> The Private Security Industry Regulation Amendment Bill proposes that South African citizens must own at least 51% of all *private security firms operating in the country.
> 
> It also grants the minister of police power to determine the different percentages of ownership across different categories of security services.





> Significant investment
> "This has not been very well thought through," said Conradie. "It is targeting a significant investment into South Africa."
> 
> The majority of the sector is already black-owned, he said, and all the major operators have already conducted black economic empowerment transactions.
> 
> The industry is the biggest supplier of entry-level jobs in the labour market and the Bill will threaten employment, he argued.
> 
> According to the police ministry, the sector has about 10 000 active private security companies, which government regulates through the Private Security Industry Regulatory Authority. The regulator has more than 1.9-million security officers on its database, of which more than 400000 are active security officers.


Slowly but surely the creeping hand of whom must own what in which sector.

I think BEE is very destructive. Any manufacturer that has to put in capital for capital equipment to get production going is incentivized to do it in any neighboring country lets say Nigeria, Botswana, Kenya, etc...
My opinion is that if you put in $5 million to buy equipment another $2-3 for working capital to pay for raw materials and wages to start it up and then have to give for free in essence 1/4th of that amount to someone for doing absolutely nothing simply to comply with law it simply means that there is a tax on foreign investment in the amount of 25%. 
Compared to Brazil and Argentina which tax capital investment at far lower rates and then if its long enough they hypothetically rebate it the situation is very absurd.

BEE in itself is basically a protectionistic matter that is not only on current investment like I mentioned above but also inter-temporal. Ergo say you give up 25% today and you are compliant, in 5 years when those people whom made you compliant slowly liquidate their investment assuming its a public firm you have to dilute your current shareholders again by 25% so theoretically its an asset tax that is periodically invoked.

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## Dave A

Not really a BEE issue by the looks of it, but perhaps a reflection of the rather narrow-minded thinking in the corridors of power at the moment. 

Either that, or they're getting seriously paranoid.

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## cyppok

> Not really a BEE issue by the looks of it, but perhaps a reflection of the rather narrow-minded thinking in the corridors of power at the moment. 
> 
> Either that, or they're getting seriously paranoid.


http://www.fin24.com/Economy/Revised...brows-20121003
I m going to pat myself on the back for smelling the improvements ahead of time. See the problem with tasting a little bit of wealth via expropriation is that there is incentive to nudge it a little bit higher. Its like a drug you steal a little from your fellow man and then you want a little more, because hey "you deserve it!". And so the wonderful spiral of absurdity starts up.

Notice the following 7 items at 40% compliance, theoretically if you hold the median in each that is about 6% compliance rate per item.
If you go to 5 items it goes up to 8% compliance per item.
If you got 3 items it goes to 13% compliance per item. In essence it will consolidate inching parasitism. 
Also notice now you have minimum targets for ownership and whatnot. So you need to give up ownership. Eventually that 10% goes to 20 or 30. 

Theoretically if you have working capital and a large business at this point as in right now would be the time to simply earn it out at full clip and not replace it because each dollar you take out is a dollar you don't looze through induced 'sharing'. Capital investment will simply skyrocket at this point, I mean collapse irreversibly.

http://www.fin24.com/Economy/Banking...s-BEE-20120902
Like I said before once BEE owners cash out you need to give out more BEE to remain compliant so you have to constantly dilute your shareholders once old BEE owners leave to give new BEE owners equity.
Thus, BEE becomes an *Asset tax* in essence that is redistributed.



> In August, black investors in retail lender Absa, represented by Batho Bonke Capital, discussed a special resolution to cash in their 3.9% stake, worth R2.2bn after tax.
> 
> If they did and the once-empowered rule were to change, Absa would need to enter into a new BEE deal.



Viva la revolucion!

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