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Risk management involves tracking market and non-market long-range risks, understanding
their adverse impact on the business environment, and managerial responses to reduce risk
exposure. As an emerging market, South Africa poses a challenging array of long-term
political, economic, financial and operational risks to investors. Risks such as concerns about
increased costs, lack of transparency, limited capacity to enforce the rule of law, government
intervention, a volatile currency, regional contagion and the HIV/Aids pandemic heighten
uncertainty about the business environment. Managerial responses to anticipate and mitigate
risks include matching mode of entry with risk tolerance, superior intelligence and lobbying,
maintaining low tolerance for corruption, selecting appropriate financial instruments and
balancing shareholder and stakeholder interests.
The risk management framework presented, consisting of three elements: type of risk, impact
of risks and managerial response to counter adverse risk impacts, may be refined and
expanded for potential application to other emerging markets.
Q 2004 Elsevier Ltd. All rights reserved.
Introduction
South Africa (SA) is known as the engine of growth for the African continent, generating 45
percent of the continents GDP from only 10 percent of its population. The countrys economic output ranks 29th in the world, making it one of the 10 leading emerging markets. SA
offers a sophisticated business environment in terms of infrastructure, legal system, natural and
human resources, telecommunication network and financial services.
Since 1994, SA has undergone sweeping political and economic transformation, but, as with
all emerging markets, transformation is a work-in-progress. Since the end of Apartheid, the
democratically elected ANC government has embarked on an extensive program of economic
liberalization. The positive results have included an increase in competitiveness, international
trade and inward bound investments. However, a variety of risks are still present in the business
0024-6301/$ - see front matter # 2004 Elsevier Ltd. All rights reserved.
doi:10.1016/j.lrp.2004.03.001
environment. After a decade of dramatic changes, it is prudent to assess the risk profile of SA
and to raise awareness of the long-term risk management policies for present and potential
investors. It is our intent to outline a risk management framework consisting of three interrelated elements: first, to identify the manifestations of various market and non-market risk
types in SA; second, to illustrate how these risks may impact on business operations; thirdthe
primary thrust of our frameworkto analyze the various policy options that managers and
firms may adopt to preempt or mitigate the adverse impact of risk.
We have organized our paper into three parts: (1) a theoretical analysis of risk management;
(2) a study of risk management in South Africa that addresses the three elements of risk identification, risk impact and managerial policy options; and (3) conclusion and suggestions for
further inquiry.
since countries are lumped together with similar aggregate scores, but different profiles for specific risks (political, financial, operational).
In this analysis the definition of risk is broad-based and captures both market and nonmarket uncertainties. Our definition includes uncertainty associated with exposure to loss
caused by unpredictable events and variability in the possible outcomes of an event based upon
chance. The degree of risk depends on how accurately the results of a chance event may be predicted. The more accurate the prediction, the lower the degree of risk. It is questionable to
regard risk as a situation where each action leads to a few known outcomes, each of which
occurs with a specific probability. Studies of risk-return utilizing sophisticated mathematical
models have mixed results with regard to outcome predictions.8 Resources (business intelligence, market or country experience, access to political power) will enhance the certainty of
outcomes. The outcome of actions related to risk may be uncertain. Each action may lead to a
set of consequences, yet the probability of these outcomes is unknown. A risky situation is one
in which the decision-maker is unsure which outcome will occur. Such uncertainty may lead to
erroneous choices and, consequently, may increase costs or the chance of loss.
To understand uncertainty, Milliken suggests risk should be viewed as a phenomenon
shaped by three related variables: state, effect and response.9 We have added type of risk to
emphasize the sources of risk and the time dimension (short, medium, long) to create a comprehensive risk management framework. Our framework for analyzing risk management in SA
is outlined in Figure 1.
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. Political risks refer to government policies and societal instabilities that adversely affect the
general business environment;
. Economic risks refer to the general condition and structure of a countrys macro-economy;
. Financial risks refer to interest and foreign exchange risks and the confidence financial markets have in a countrys government and central bank. It is determined by (and is reflected
in) the volatility of a currency in its exchange rate with major currencies;
. Operational risks such as employee issues or credit uncertainties, are similar to firm specific
risks as outlined above.
State of the risk environment
State of the risk environment refers to uncertainty about the current actions of key players and
stakeholders in the business environment, i.e. the government, labor unions, competitors, suppliers, shareholders and customers. General changes in this environment such as socio-cultural
trends, demographic shifts and instability during the transformation of economic and political
life in a country can also produce uncertainty. Uncertainty about the future behavior of stakeholders such as government intervention in or withdrawal from the economy, regime changes,
and nation-wide labor strikes has a bearing on the state of risk in a country. As Cummings and
Doh find, players or stakeholders behavior toward the processes of change in the business
environment can also influence the state of risk.11 In general, business managers perceptions
of risk and uncertainty will be increased in a business environment characterized by volatility,
complexity and deep societal cleavages.
include choices about mode of entry, lobbying political decision makers, intelligence about
unfolding events, low tolerance for corruption, financial instruments, balancing shareholder
and stakeholder interests.
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State of risk
Firm examplesi
Political
Regional Instability
Weak Capacity to
enforce law
Corruption due to Conflicts of Interest
Economic
In GEAR scenario; weaker competi- 1. SA firm, Freeplay Energy Grp, relocates to far
tive advantage
East, citing desire for economies of scale,
Critical unemployment Strengthen populism, weaker free
elimination of middlemen, & bigger intl marlevels
market
kets
Inadequate liberalization Over regulated sectors
2. Leak of government BEE plan scares away
$1.5bn investment in mining industry. BHP
Black Economic Empow- Uncertainty re current & future
Billiton, Rio Tinto & Anglo American suffer
erment
government intervention & regulalarge sell-off.
tions
3. Chemical firm Omnia increased imports by
Infrastructure
Supply chain concerns
40%. Transport system could not cope causing late deliveries to
customers
Operational
HIV/AIDS pandemic
Financial
264
governments commitment to property rights and the rule of law will be tested in the face of
radicalized political expedience.16
Economic risks
In the long-term, Boyd, Spicer and Keeton envisioned three possible scenarios for South
Africa.17 A top-gear scenario is characterized by GDP growth of 56 percent pa, unemployment halved within a decade, and per capita income doubling over 25 years. An in-gear scenario outcome includes modest improvement in governance, GDP growth of 34 percent pa,
but increased unemployment. A reverse-gear scenario outcome entails negative growth, political instability and large-scale state intervention in the market place to meet populist demands.
The in-gear scenario appears to be the most likely for the next decade. SA averaged annual
GDP growth of 2 percent over the past decade, and a 34 percent growth rate is projected for
the next five years. SA has made tremendous advances in economic liberalization and in the
improvement of market competitiveness. This transformation has reached a plateau, and it is
the opinion of these authors that it is vital for the SA government to continue with deregulation, privatization of SOEs, appropriate education and skills transfer, and the promotion of
small business entrepreneurship in order to meet long-term challenges. The high unemployment rate and poverty levels are long-term threats to political stability and neo-liberal economic policies, and only a move towards the top-gear scenario can mitigate these risks.18
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government has a majority stake. SAs largest business association, SACOB, has supported
firms that cited BEE as a risk factor.
Affirmative procurement under BEE guidelines, which has not been fully defined, has raised
new uncertainties about access of foreign firms to government contracts. Foreign firms that
seek government contracts face the risk of restrictions on the repatriation of earned income. A
contract with an import content of US$10m or more will require the seller to invest at least 30
percent of the value in a local black owned business. In the case of defense bidding, the figure
increases to 50 percent.
BEE will subject businesses to more governmental regulations. Firms will have to meet
extensive balanced score card evaluations of their BEE progress. Long-term uncertainties have
also emerged in the business community regarding the likelihood that the government may
increase BEE targets and quotas in the future or penalize firms that fail to comply voluntarily
with BEE targets and timelines. In sum, BEE is likely to harm the complementor relationship
between business and government that has been built over the last decade.
security of assets and inventory are time consuming and costly for firms. The lack of capacity
and credibility within the criminal justice system compounds this risk exposure.22
Third, the HIV/AIDS pandemic has added a new facet to the long-term risk landscape. SA
has the highest infection rate in the world with 5 million out of a population of 43 million HIV
positive. SA is facing the death phase (deaths > infection rate) of the disease over the next
decade. The depletion of human capital, i.e. the stock of experience, skills and education, will
adversely impact on the economy in the long range. Poverty and government intransigence
have resulted in poor access to anti-retroviral drugs and a low priority for preventative
education. In the long-term, labor productivity will suffer. In work places, there will be high
absenteeism, high staff turnovers due to deaths, diminishing transfer of skills and a generally
sickly workforce. Lowly skilled workers and young managers face the highest risk of infection.
In turn, low productivity will result in lower profitability and higher costs for firms, low
economic growth and a reduction in market attractiveness to both existing and potential
investors.23
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credit worthiness and to manage counterpart limits to control risk. International and local
credit rating agencies such as Duff & Phelps Credit Rating Agency of SA currently rates
approximately 200 of the largest companies in SA. For larger counterparts, securitization of
receivables and credit derivatives may be used. For SME counterparts, prepayment, cash
against delivery and letters of credit may be used to mitigate risk. BEE has spawned many firms
and consortiums with uncertain credit worthiness, and firms setting up supplier contracts or
joint ventures with such firms can face a daunting task to limit exposure to counterpart and
settlement risks ranging from financial distress to operational uncertainties and bad debts.
SA presents interesting event risk and contagion risk perspectives for management. Since it is
more politically stable than its neighbors, a firm may use SA as a launching pad for distribution into Sub-Saharan Africa. However, if investments involve large upfront sunk costs and
long pay back periods, then SA represents more risk than developed markets. With a global
credit crunch or jitters in other emerging markets, SA tends to get punished by financial markets along with other debtors in this category: political instability in Zimbabwe and debt
defaults in Argentina have both unnerved international investors in SA.
Managerial response
To conduct business in SA, management must reduce, mitigate and transfer risk exposure. Five
board policies have relevance for anticipating and reducing risk: mode of entry, lobbying and
intelligence, low tolerance for corruption, financial instruments, and balancing shareholder
and stakeholder interests. Policies are not necessarily risk type specificrather they may be
used to counter the full array of risks.
1. non-equity or export mode, preferred by firms perceiving high risk since it shifts most of the
risk to another firm;
2. joint venture mode (JV), whether with a majority, minority or 5050 percent share, suitable
where risk is perceived as moderate and
3. wholly owned subsidiary, established or acquired, when the perceived risks are low.26
Given SAs risk profile, the exporting and joint venture modes offer the best risk management options.
The desire of foreign investors to reduce risk exposure as well as the government policy to
promote BEE have made Joint Ventures the most common mode of entry. JVs may take many
organizational forms. A foreign firm and a SA firm may establish a JV. Renault, the French
automaker, formed a JV with Imperial Holdings Ltd., SAs largest transport firm, to sell automobiles. Renault acquired 51 percent of the JV at a cost of $9.8 million. The JV operates 47
auto dealerships in SA and has targeted an increase in market share from 4 percent to 7 percent
in three years.27 A second form is a JV between a foreign firm and a South African BEE. The
worlds largest marine salvage operator, Tsavliris Salvage Group of Greece, formed a JV with
Cape Diving & Salvage of South Africa that has a 66 percent black equity stake. This JV is well
positioned to negotiate a government salvage and rescue contract and to secure competitive
268
advantage in salvage operations to the oil exploration industry off the southwest coast of
Africa. Services include fire fighting, medical evacuation and pollution control.28
SA subsidiaries of foreign firms have also formed JVs with other SA firms. Ranbaxy SA Pty, a
wholly owned subsidiary of Ranbaxy Laboratories Ltd. of India, formed a JV with SAs Adcock
Ingram, the health care division of Tiger Brands. This 5050 percent JV competes in the antiretroviral market in SA. Adcock Ingram leverages its strong distribution and supply network and
leadership position in the pharmaceutical private market and hospital sector. Ranbaxy manufactures and markets branded generic pharmaceuticals in over 100 countries. Ranbaxy has a
strong R&D capability with proprietary platform technologies. Although a low margin business,
this JV will rely on cost effectiveness and economies of scale for long-term profitability.29
Eurasia Mining PLC joining with Randgold & Exploration Company is an example of a JV
between a foreign firm and a SA firm where the foreign firm has the option to acquire a majority
share. The JV was established to explore for platinum in the Bushveld Complex. Eurasias initial
acquisition of a 25 percent share, may be increased up to 75 percent within 12 to 15 months.
Merger and acquisition is another approach. The SA subsidiary, PricewaterhouseCoopers,
merged with MSGM Masuku Jeena, Inc., SAs largest black owned accounting firm. The merger
met the BEE targets of equity ownership, operational control and employment equity.30
The non-equity export entry mode into the SA market has grown exponentially since 1995.
These exports constituted one-fifth of the total local market in 2002. Major exports to SA
include capital equipment and intermediary goods such as machinery (30.9 percent), primary
goods such as mineral products (12.8 percent), chemicals (11.8 percent) and consumer goods
(7 percent).31
Due to non-viable domestic economies of scale, the expansion of SA manufacturing sector
has added to the volume and value of imports of investment goods and capital equipment.
Exporters to SA often enjoy a competitive advantage since their products are often less expensive and perceived as superior in quality when compared to local products. For example, SA gas
container manufacturer Cadac has lost about 25 percent of its share in the local market to less
expensive imported products from Thailand and Portugal. Cadac blames its loses on the high
cost of imported valves and inflated prices paid for steel produced by ISCOR. ISCOR employs
import parity pricing which results in domestic buyers paying more than foreign buyers for
ISCORs steel.32
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of regulations. Intelligence monitoring is essential to track the progress of these goals, and
access to political decision-makers in SA and in the firms home country is an advantage.
Obviously, large multinationals have an advantage over SMEs as lobbyists and campaign
finance contributorsnonetheless, all firms, regardless of size, should endeavor to influence
economic decision-making. Interest aggregation is the most effective form of lobbying, and
trade associationsindustry based or countrywidewill be more effective lobbyist than individual firms. Government consultations with interested parties offer opportunities during the
legislative process to influence bills dealing with labor relations, free trade negotiations and
BEE. Presentations during the committee stage of a bill provide trade associations with a public
venue to shape legislation and regulatory outcomes. Political power in SA is concentrated in
the Executive rather than the Parliament, and thus the most effective lobbying efforts are those
directed primarily at the political executive (president and cabinet ministers) and the bureaucratic executive (managers of government departments and SOEs).
Firms may utilize lobbying to renegotiate the terms of BEE industry charters. The mining
sector and its trade association, Chamber of Mines, have successfully lobbied the government
to reduce the 51 percent quota to 26 percent for equity ownership for BEE firms within ten
years. The governments prescribed ten-year term for mining companies to underwrite R100bn
to finance black equity ownership has been reduced through negotiations to five years. The
experience of the mining sector with other BEE targets shows that it will be difficult and costly
to effect change within a ten-year period. Negotiations or lobbying, rather than noncompliance, will determine adjusted BEE timeframes and targets. The ten-year target of 26 percent BEE equity ownership will be subject to the availability of debt finance and the presence of
willing sellers-buyers. Foreign investors will be frightened if stocks are not sold at fair market
value and within the bounds of acceptable risk exposure. Firms may lobby the government for
tax incentives to offset additional costs and risks incurred with the implementation of BEE
quotas.35
For the next few years, FTA negotiations between the USA and SACUof which SA is the
dominant memberwill be ongoing. The institutions, laws and practices that will shape free
trade between the USA and SACU will be established. Firms and trade associations have a
unique opportunity to lobby the USA and SA governments to further deregulation, to improve
good governance (transparency, capacity building and anti-corruption), and to establish fair
competition for government procurement contracts. SA concluded a FTA with the EU in 1999
and is currently pursuing FTAs with the US, China, India and Mercusor which will afford
similar opportunities to influence the long-term outcomes.36
To retain competitive advantage in an emerging market like SA, it is vital that firms maintain sound intelligence in anticipating risk-generating events and behavior of key stakeholders.
Domestic and international issues that create uncertainty and could potentially degenerate into
crises must be continuously monitored with a long-term perspective in mind. If SA moves
from an in-gear to a top-gear scenario, risks will dissipate and more business opportunities will
emerge. However, contraction of operations to limit losses might be necessary if the economy
slides from an in-gear to a reverse-gear scenario. Political, economic and business data are
freely available due to the global reach of the Internet and the IT connectedness and sophistication of the SA business and communication environment. Outsourcing risk management to
SA or global consulting firms is another sound option.
. . it is vital that firms maintain sound intelligence in anticipating riskgenerating events and behavior of key stakeholders
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equity transfers to hastily-created consortiums comes at the risk of insufficient attention to due
diligence and financial scrutiny. Commercial loans, instead of financial engineering and specialpurpose vehicles, should be used to protect a firms competitive advantage and shareholder
gains, and to limit financial distress among BEE firms. In any deal, the gearing risk of BEE
firms (debt or cover ratio) should be determined before a sale. Firms may exploit BEE by selling under performing business units to BEE firms.39
The pursuit of profitability and market share must have a human face
Some firms, such as Anglo American and Old Mutual, have adopted comprehensive health
care programs, including provision of free anti-retroviral therapy. These programs have
reduced long-term costs by 3240 percent. SMEs, with fewer resources, will still benefit by providing prevention information to employees. By spending $1015 per worker, the infection
rate may be reduced by as much as 50 percent. It is essential for firms to calculate fully the cost
of HIV/Aids. This includes individual costs, direct (medical care) and indirect (productivity
losses); and organizational costs, direct (insurance premiums) and indirect (managerial time
and depressed morale). The cost of Aids accumulates over time as the health of a worker dete272
riorates. The SA Institute of Chartered Accountants favors the inclusion of Aids costs as a balance sheet item. The cost of prevention may range from 0.4 percent to 5.9 percent of a firms
annual wage bill.41 However, firms are not solely responsible for fighting HIV/Aids, but should
develop a coordinated strategy with other stakeholders such as medical scheme providers,
government agencies, NGOs like the Global Fund, labor unions such as COSATU and trade
associations.
Firms will also incur additional crime prevention costs including (1) employee training and
counseling for personal safety issues such as kidnapping, rape and carjacking; (2) surveillance
of workplace, plant and warehouse, and supply chain; and (3) associated insurance coverage
for loss and liability.
Firms operating in SA already add value to many stakeholders via direct and indirect taxes;
interest to lenders; rent to landlords; and wages, salaries and benefits to employees. The BEE
policy will, at least in the short-term, add additional value to many stakeholders that will come
at the cost of shareholder dividends and returns unless high economic growth rates increase
sales to consumers. BEE requirements that suppliers (B2B, B2C) should be at least 51 percent
black owned may have a disruptive impact on supply chains that have been built over time.
Three coping strategies have emerged:
1. frontingthe practice of firms to use businesses controlled by Blacks or women to acquire
procurement contracts;
2. first-to-marketthe oil firm, Engen, moved first to award a tender for freight and cleaning
to Emtateni Freight Plus, a BEE supplier with a solid reputation; and
3. non-complianceSMEs, often family owned, lack the resources to meet BEE requirements.
The BEE policy will also increase demands for corporate social investment (CSI). Although
the demand is still at the low rate, firms will be expected in the long range to provide more
public goods such as education, crime prevention and health care to disadvantaged communities. Firms may benchmark the CSI of SAs National Business Initiative or banks such as
Citibank, Westpac (Australia) and Standard Bank (SA).42
Conclusion
Risk management in SA requires the identification of specific risks and their adverse impact on
business. A number of response strategies are suggested to reduce exposure to long-term risks.
As part of strategy, these policies offer a more focused approach to deal with risk, something lost
in the aggregated rankings in country analysis. The utility of our framework requires further
application in SA. The uncertainties in many sectors in SA challenge managers to understand
and control industry or firm specific risks more effectively. For management researchers faced
with multidisciplinary demands to understand risk management in foreign markets, continued
exploration is essential to comprehend the impact of politics and other non-market forces on
business decision-making. The future role of the SA government as an owner and co-opter or
consumer and business-friendly rule-maker will determine market attractiveness in SA.
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comparative studies of emerging markets. This will be a positive step in identifying potential
common trends in risk management in societies in the process of political, economic and
social transformation.
Acknowledgements
The authors would like to acknowledge the helpful comments of two anonymous reviewers
and the editor as well as Philip Court, Pieter Haasbroek, Jorge Jara and Wilbert Baerwaldt.
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2004
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29. Ranbaxy and Adcock Ingram form joint venture in South Africa to market anti-retroviral products, Business Wire 2, 16 October (2002).
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Biographies
Jay van Wyk is an international business consultant and the author of Contemporary Democracy, published by
Congressional Quarterly. He holds a Ph.D. in International Relations/Political Science from the University of Pretoria, a MBA from Purdue University and a MBA from Tilburg University, The Netherlands. Meerkat Associates, 6
Camino Norte Vista, Placitas, New Mexico 87043 USA Tel: 1-505-771-0463 Email: meerkat@nm.net
William Dahmer is a Managing Director at Reserve Invest Cyprus Limited. His experience is in banking, treasury
and finance with a special focus on the emerging markets of EEMEA. He holds a MSM from Purdue University and
a MBA from Tilburg University in The Netherlands. He is a FSA Registered Person and an Affiliate Member of the
Securities Institute in the U.K. Reserve Invest Cyprus Ltd., Bld. 1, 47 Bolshaya Polyanka St., 119180 Moscow, Russia.
Tel: 7 095 929 9526 ext. 1247 Email: William.dahmer@capital-ig.ru
Mary C. Custy is an international business consultant focusing on legal and political issues in emerging markets.
She holds a JD and MA in International Relations from the University of South Carolina and a MLIS from Catholic
University of America. She is the author of Jurisprudence of United States Constitutional Interpretation, published
by Fred B. Rothman Publications. Meerkat Associates, 6 Camino Norte Vista, Placitas, New Mexico 87043 USA.
Tel: 1-505-771-0463 Email: meerkat@nm.net
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