the role of investment in strategic projects, partnerships ... · identifying local partners....

Lesley A Wentworth

UKZN – Extended Learning – Trade, Investment Promotion & Economic Development (Module 1)

The role of investment in strategic projects, partnerships and value chains

• Understanding Investment Promotion • Foreign Direct Investment• Investor Decision-making for Long Term Value • Strategic Integrated Projects • Public-Private Partnerships • Regulatory Context (Public and Private Sectors) • Supply and Value Chain Management

Course Outline

• FDI generates economic growth for host country … through:

• direct employment generation,• linkages with suppliers,

subcontractors and service providers.

• However, there is evidence of negative effects of FDI … Discussion.

What is it good for?• FDI is the acquisition of a lasting

interest, (10% stake), in an enterprise operating outside the investor’s country of domicile, with the purpose of gaining effective say in the management of the enterprise.

• Domestic investment: when a local company/ individual acquires lasting interest, (10%), in company operating in their country of domicile, with the purpose of gaining effective say in the management of the enterprise

Definitions

Investment

Modes of entry

Brownfield Investment

Mergers and

Acquisitions

Joint Ventures

Greenfield Investment

• Host country … v. Home country• Linkages with suppliers,

subcontractors and service providers.

• Adequate absorptive capacity • Domestic businesses are not

"crowded out"• Facing foreign competition.

Discussion point: What is the interplay between FDI and domestic investment?

Investment Concepts

Explaining FDI Motivation

Investment promotion

• First generation

• Second generation

• Third generation

Investment Promotion Circa 2000• National FDI policies have been

focused on making the investment climate more welcoming for foreign investors.

• This points to countries desire to attract FDI to help them advance their economic growth and development.

Investment promotion before 2000

Investment promotion

• Emphasis on innovative capacities, especially R&D facilities

• Attracting FDI through push & pull factors, e.g., evolution of MNEs into integrated international production networks and the global value chains.

Investment Promotion post-2000

• Investment facilitation definition - concerns the application of investment policy

• Benefits of investment facilitation

• WTO’s structured discussions aimed at developing a multilateral framework on investment facilitation

Investment Promotion and Facilitation

Investment Promotion and Facilitation

• Investment facilitation improves the efficiency of policies.• Improves the efficacy of policies through downstream engagement with

investors identifies opportunities for sequential and new investment and thereby underpins investor retention.

• Important for advancing the Sustainable Development Goals.• Critical for trade e.g. Preferential trading schemes attracted investment to

Africa for the export of garments.• Diversify production, • Increase value addition, • Alleviate the saturated market for apparel exports, and take fuller advantage of

existing preferences.

Benefits of Investment Facilitation

• Backward linkages (local sourcing) are particularly important for skills, jobs and management transfer.

• There is mutual interest for both host countries and foreign investors.

• Host Countries

• Foreign Affiliates

Investment PromotionUnited Nations

(UNCTAD, UNIDO,

UNESCAP, WAIPA)

Organisation for Economic

Cooperation & Development

World Bank (MIGA, IFC, FIAS, Doing Business)

Site Location Consultants

Government Agencies

(IPAs)

Investment Promotion Circa 2000

Investment Promotion

Accountability

Positive image of the

Economy

Identifying local partners

Incentive policies

• To implement their economic development strategy.

• Inward investment promotion

• ‘One-stop-shops’

Government’s Role in Investment Promotion

OFDI generates income in the home economy, both when EMNEs repatriate foreign-earned profits and when OFDI increases exports of EMNEs and other firms.OFDI has the potential to enhance knowledge, skills, technologies, and other spillovers and competition effects. Some of the capabilities acquired abroad are transferred back to company headquarters. Moreover, OFDI that transfers lower-end production to other developing countries can induce home economy industrial upgrading by freeing up capacities to focus on higher-end activities.OFDI facilitates access to resources, raw materials and capital goods available in host economies. Transferring these to the home country may, for example, ease shortages of natural resources, increase production capacities, enhance resources security, and raise productivity in the developing home economy.

Government’s Role in Outward Investment Promotion

• Political Factors

• Economic Factors

• Legal Factors

• Social Factors

Investment Climate

WBG Doing Business Indicators

Countries targeting sustainable FDI, with recent research from the UNCTAD and Columbia Centre for Sustainable Investment (CCSI), in association with the UNs’ World Association of Investment Promotion Agencies (WAIPA) focused on IPIs attracting sustainable investment projects against four criteria:

• Economic development (including linkages, training, and skills and technology transfer); • Environmental sustainability (centring on minimising environmental impact); • Social development (including employment standards and community development); • Good governance (addressing issues of transparency and fairness in contracting).

Including Sustainability

• UNCTAD outlines 3 major classes of incentives:

• Financial• Fiscal • Other

• The World Bank’s Investment Climate Unit recognises either fiscal or non-fiscal elements in 2 types of incentive:

• Regulatory: • Financial:

Investment Incentives in brief• FDI involves:

• More complex motivations • FDI flows in different directions –

inward and outward• Driven by new actors• Changing composition of capital• Use of new modalities • A patchwork of IIAs• An understanding of the costs

and benefits of incentives and when and how to apply them

Investment Promotion today

Investments

• A system to ensure that revenue loss is minimised;

• Cap on expenditure;

• Time limit on the duration of the incentive; • Incentives that are transparent; • Incentives must be uncomplicated;

• Incentives should have low administrative costs for both businesses and government.

Incentives and FDI

The Global FDI Picture

Source: UNCTAD, World Investment Report, 2017


“Bumpy”

The Global FDI Picture

FDI in African Regions


UNCTAD IPA Survey

Political Risk• Political

violence• Expropriation• Inconvertibility• Default

ADR• Settling

disputes• Neutral

evaluation• Negotiation• Conciliation• Mediation• arbitration

ISDS• Individual

companies sue States for investment violations.

• Limited supply of investment• States can compete for FDI by:

• Providing incentives (such as tax holidays, loan guarantees and cash grants)

• Differentiating legal jurisdictions from their competitors.

• Legal reform: an important tool for developing countries to attract FDI.

FDI Policy

FDI• Attempts at enshrining ISDS in a global treaty on investment.• History of MAI negotiations.

Policy• Efforts refocused on negotiating regional agreements and BITs. • One-off arbitral tribunals review the cases. No international investment court

Cntd.• Composition of the tribunals• SA’s negotiating history of BITs

FDI Policy Continued

SA FDI Policy in Context

Investor Decision making for long-term value

Political Risk

Investor motivation

Source: World Bank Global Investment Competitiveness Report , 2017

• Determinants of FDI reflect a wide range of influential factors relating to its destination:

• Access to markets,

• Macroeconomic stability,

• Predictable policy environment,

• Efficient regulations and procedures,

• Low level of corruption,

• Well-educated labour force,

• High-quality infrastructure, and

• Location’s historic cultural ties.

• MNCs expand to maximise profits when the firm has grown so large that the domestic market is saturated.

• Larger organisations have greater financial assets and are better able to recover from shocks. As a result, larger companies enjoy a greater role in global FDI flow.

• FDI is typically characterised by a company’s market-specific prior experience with increasing commitment. So, export is the first step, allowing a firm to enter a foreign environment without the immediate increase in production capacity required by FDI.

• The greater a company’s international operations and direct export for sales, the more likely the company is to invest to preserve market share and to lower costs associated with tariffs, production, trade, and patents.

• As demand for a product increases in a particular market, the company may establish local production.

Investor motivation – Basic steps

Investor motivation

Source: World Bank Global Investment Competitiveness Report , 2017

• MNCs expand to maximise profits when the firm grow large - saturation

• Larger organisations + greater financial assets =recover from shocks = enjoy a greater role in global FDI flow.

• FDI is typically characterised by a company’s market-specific prior experience with increasing commitment. e.g. exporting

• Big international operations are more likely to invest to preserve market share & to lower costs associated with tariffs, production, trade & patents.

• As demand for a product increases in a particular market, the company may establish local production.

• Assumption that multinationals are knowledge-intensive firms and this generates • Ownership advantages

• Mobility: the services of knowledge capital can be easily transferred; • Labour-intensity: knowledge-based assets are usually skilled and labour-intensive relative to

production, and this generates a motive to operate different tasks in different locations; and public good nature of knowledge capital

• Location advantages• Horizontal Expansion: the MNC sets up host facilities mirroring those at home. Location

advantages: host economy and trade costs are large, and FDI would serve as a substitute for trade.

• Vertical Expansion: the MNC chooses to fragment production and to locate some stages of production abroad in order to access specific resources not available elsewhere or to arbitrage (simultaneous buy-&-sell) to offset factor prices.

• Internalisation advantagesKnowledge capital generates ownership advantages and risks of asset (e.g., IP) erosion associated with arm’s-length transactions.

Investor motivation

A value chain refers to the production flow that a product follows from the point of its inception until it reaches the customer.

The Rise of Value Chains

With deepening interdependency of economies through international trade in completed goods, the share of trade in intermediate goods has substantially increased with global production fragmentation.


Source: Quynh, Nguyen P.; Thu, Le T. A.; Thuy, Le M (2016)


Source: João Amador and Sónia Cabral(2012)

Discussion• In light of Africa’s industrialisation and regional integration

imperatives, what opportunity does value chain development present to South – and Southern Africa?

• Any benefits to South Africa of its location in SADC’s region?• In which sectors?


Strategic integrated projects

SA’s economicPriorities

Priorities

NDP 2012

eliminate poverty & reduce inequality by 2030

Industrial Policy Action Plan (IPAP

Challenges

Low national savingsUnpredictable portfolio flows Widespread unemployment

High crime ratesLow education & skills development

New Growth Plan

South Africa’s Economic Priorities


Source: the dti

• Public procurement- greatly enhanced and enforced compliance with localisation targets.• A strong focus on spillovers and labour-intensive sectors – in particular, agro-processing,

clothing, textile, leather and footwear (CTLF) sector, component manufacturing and sub-assembly sub-sectors in automotives, rail, light manufacturing and engineering in the metals sector, plastics and associated sub-sectors; electro-technical assembly, sub-assembly and component manufacturing; downstream timber and pulp products, including furniture and boatbuilding.

• Carefully targeted Industrial financing and Incentives - including a) much stronger export credit and export credit insurance support, in combination with a wide range of sector-specific incentives; and b) energetic implementation of the recently launched Black Industrialists Incentive.

• Leveraging the devaluation of the Rand to make South African manufactured products more globally competitive and create opportunities for the expansion and further development of SA's domestic manufacturing capabilities.


IPAP 2017/18-2019/20• Overcoming structural hurdles to development and industrialisation:• Enhancing the contribution of manufacturing to a more inclusive economy both by

promoting black industrialists and small business;• Supporting large, lead and dynamic firms, greater attention will be paid to providing

holistic support to emerging enterprises and maximising employment;• Diversifying away from commodity dependence, taking advantage of the slowdown in

commodities to promote new industries and activities that are more sustainable, higher value add and encouraging employment creation;

• Developing integrated regional value chains for opportunities for industrialisation in SADC (and SA); reducing logistics costs, regulatory delays and fees and transport and ICT infrastructure;

• Responding proactively to massive technology shifts (Industry 4.0), digitisation, the IoTs and big data capabilities;

• Drawing on all possible state levers based on clear priorities, consistency, and strong alignment across the state


Infrastructure development is central to the NDP, so high levels of investment in infrastructure will continue into the foreseeable future.

The Presidential Infrastructure Coordinating Commission (PICC) developed the National Infrastructure Plan

Identifies 18 strategic integrated projects (SIPs), clusters of infrastructure projects considered key for promoting economic growth and supporting service delivery to the poor.

Infrastructure

• An Infrastructure Plan with identified Strategic Integrated Projects (SIPs) has been developed and adopted by Cabinet and the PICC

• PICC is the established structure to address the challenges through coordination, integration and accelerated implementation

• Develop a single common Infrastructure Plan driven and monitored centrally• Identify who is responsible and accountable • Develop a 20-year planning framework beyond one administration

• An Infrastructure Book has been compiled, which contains more than 645 infrastructure projects across the country - http://www.southafrica-newyork.net/consulate/pdf/SA%20investment%20opportunities%20June%202014_2.pdf

Public infrastructure projects to the value of USD360 billion for implementation up to 2023. Almost 80% of the value is in the electricity generation and transport sectors.Projects at the conceptual, pre-feasibility and feasibility stages represent 48% of the total in value terms.

SIPs and the PICC

http://www.southafrica-newyork.net/consulate/pdf/SA%20investment%20opportunities%20June%202014_2.pdf

• Long-term assets with long economic life • Low technological risk • Provision of key public services • Strongly non-elastic demand • Natural monopoly or quasi monopoly market contexts • High entry barriers • Regulated assets • Frequent natural hedge against inflation • Stable, predictable operating cash flows • Low correlation with traditional asset class and overall macroeconomic performance

Characteristics of Infrastructure Investments

Institutional Investment in Emerging Markets

Georg Inderst & Fiona Stewart, 2014

Public Private Partnerships

• 1980’s: New Public management

• Roll-out of deregulation, privatisation & liberalisation policies.

PPPs

• Problematic transitions of infrastructure facilities.

PPPs • 1990s to date, private sector involvement in infrastructure has deepened and matured

PPPs

The emergence of PPPs

Risk in PPPs

• Stakeholders should be able to take an overall view of the project objectives and decide whether a PPP is the best way to proceed. This requires a realistic cost-benefit assessment to determine whether the government or a private contractor would be able to provide the service more cost-effectively.

• The public sector comparator (PSC) model is a detailed and pragmatic assessment of all costs of the proposed PPP project – with “delay risks … inflation effects, lifecycle costs, finance charges [and] operating costs” included. A net present value calculation is performed to compare the public sector cost against the price of PPP project. The value for money (VfM) assessment is the difference in cost estimate between the traditional public delivery (public sector comparator) and the proposed cost of the PPP model.

• Recommendations that VfM tests be conducted at each of the points – when selecting the appropriate procurement methodology; when assessing the PPP bids; and at fitting stages through the duration of the contract.

Value for Money

Continuum of Control: Public Asset & PPPs: Risk-Reward

Enabling Environment

Regulatory framework

Legislative framework

Clear political will

PPP lawsSectoral

laws

Rigorous contracting

Policy governance

These are complex long-term contracts• Flexible from 15, 20, 25 years or more,

depending on the project. Technology, demographics, environment & politics.

• Success of PPPs: allocation of risks & the definition of the framework, principles, & rules to deal with change.

• PPP contract: a set of incentives & penalties to potential actions of the parties, to ensure the stability & sustainability of the project.

PPPs: Why and When?

Questions?

Thanks!

Contacts –[email protected]

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