(Marcus Yam/Los Angeles Times)
In its 2024 medium-term budget policy statement on October 30, the Government of National Unity (GNU) reiterated its efforts to “attract more foreign investment.”
The latest iteration of the well-worn “investor-friendly” mantra is a desperate attempt to draw foreign capital into South Africa. But history shows that this strategy is a mirage, promising prosperity but delivering little.
The case of Samancor, the world's second largest chrome mining company, is a stark reminder of the predatory nature of unchecked foreign investment.
“Investor-friendly” policies may temporarily attract foreign capital, but they do not result in investments that further advance development goals, create long-term economic growth, and/or improve social equity. Not confirmed.
The Samancor Chrome story is a textbook example of how “investor-friendly” policy decisions have enabled corporate looting at the expense of long-term development.
Samancor, once a South African-owned industrial powerhouse, was allegedly stripped of its profits by foreign companies through a web of financial arrangements.
R7.5 billion was siphoned out of the country in just four years, according to an ongoing lawsuit filed by the former head of the Association of Mineworkers and Construction Unions (AMCU), the Center for Alternative Information Development and Whistleblowers. . This deprived the nation of vital tax revenue, trust income for workers and communities, and valuable assets for the nation.
The amount of wealth lost through profit shifting and illicit financial flows is staggering. Estimates suggest that total illicit financial flows amount to 4% of South Africa's GDP (approximately R300 billion) each year, with R100 billion lost in tax revenue alone each year. This is roughly equivalent to the entire government police budget, or more than a third of the health budget.
* Source: National Treasury Budget 2024-25, author's calculations.
Plunder of Samankor
One of the main allegations against Samancor concerns the establishment of its Malta-based subsidiary Samchrome.
AMCU claims Samkrom was simply a conduit to siphon profits from South Africa. The company is said to have funneled billions of rands into offshore entities that charged exorbitant fees with no added value and were subject to little corporate tax, and were controlled by Samancor's directors.
Other allegations include the sale of a 50% stake in Samancor subsidiary Tubatse to Chinese company Sinosteel.
Aziz Pahad, then deputy foreign minister, proudly announced that “Chinese parastatal company Sinosteel will invest $230 million (R1.7 billion) in a ferrochrome mine and smelter project with South Africa’s Samancor. Our promise has been confirmed.” .
However, Samancor's 2008 annual report reflects only the $100 million received on its books. The remaining $125 million was diverted to offshore accounts controlled by Samancor's majority shareholder, Kelmas.
This incredible event is supported by email correspondence cited in the whistleblower's affidavit. Nedbank Capital said it “received $25 million and $75 million at the behest of Sinosteel.” In a subsequent email, they said: “We can also confirm that Nedbank London has received $125 million into Kermas' account.”
This shows how often foreign investment does not deliver the promised returns and raises the question of how such significant differences could have been overlooked.
Given the high-profile nature of this transaction, organizations such as the Accountant (KPMG), the Department of Trade, Industry and Competition, the South African Revenue Service, the Treasury and even Nedbank are aware of discrepancies with what has been made public. It's puzzling that there doesn't seem to be one. Sales price and amount actually received by Samancor.
This case highlights the importance of increased transparency and accountability for corporations, especially large corporations. Requiring companies to make their financial records public could help prevent such corporate fraud.
It’s not just lost taxes: wage evasion
The impact on South Africa goes beyond just the loss of tax revenue. The diversion of funds from Samancor deprived the company's employees of potential wage increases and impaired the company's ability to meet its social labor plan obligations.
In a supporting affidavit to the court, AIDC called this practice of profit shifting and subsequent wage cuts “wage evasion.” An investigation into Lonmin as part of the Marikana Commission found that profit shifting was directly linked to the illusion that the company could not afford the wage increases demanded by jackhammer operators. This highlights the direct impact these practices have on workers' lives.
The court ordered an independent evaluation of the allegations against Samancor made by BDO.
Mr. Samankor argued that the report's findings show there is no need for action. However, they refused to share the report with AMCU, claiming that they had no obligation under Article 165.
AMCU disputed this, arguing that Article 165 provides a further right of recourse if such an investigation is alleged to be unreasonable or incomplete, and this right is not available if the findings cannot be assessed for oneself. He argued that it would be meaningless.
A court hearing on November 5 was to determine whether AMCU would have access to the report. A verdict is expected in early 2025.
This case of Samancor's profit shifting could be a watershed in South Africa's corporate history. It is the first time that a trade union has launched such a high-stakes legal battle against a multinational company demanding R1.5 billion in compensation to workers.
Although this is unprecedented, it highlights the potential for labor unions to act as watchdogs over companies. By demanding transparency about subsidiary finances and cross-border transactions when negotiating wages, unions can play an important role in preventing future corporate misconduct.
The transformation of Samancor from a proud South African company into a mere vehicle for foreign interests epitomizes a worrying trend of erosion of domestic control over what was once a national asset.
Rather than viewing illicit financial flows as the result of the misbehavior of a few “bad apples,” countries should consider how large-scale economic policies enable these flows and, if necessary, It is necessary to make changes. This includes reversing the easing of foreign exchange and capital controls in the 1990s and increasing reporting requirements for companies.
By putting the needs of its people ahead of the interests of multinational corporations, South Africa can start on the path to a more just and prosperous future. The Samankor incident was a stark reminder that the foreign investor-friendly model is a failed experiment. The time has come to radically break away from this destructive path.
Foreign investment as a threat to domestic development and sovereignty
Prioritizing foreign investor-friendly policies removes planning and control and prioritizes profit-making opportunities, regardless of how they relate to South Africa's other development goals, such as reducing poverty and unemployment. means to. and inequality.
We cannot continue to view development goals as benefits to be derived from growth rather than as goals in and of themselves.
Chloe van Biljon and Jaco Olofsen are Alternative Information Development Center. Read more about this incident here. affidavit, court documents. This work is also published below amandla magazine.
