This week, the South African government hosted the sixth South Africa Investment Conference (SAIC) in Johannesburg. President Cyril Ramaphosa used the opportunity to rally local and international investors to commit to an ambitious investment target of R2 trillion over the next five years. Sounds great, but unless investors have a reasonable chance of making a profit in South Africa, they are unlikely to deploy their capital here.

This year is the 250th anniversary of the publication of arguably the most influential text in economics: An Inquiry into the Nature and Causes of the Wealth of Nations by Adam Smith, the great Scottish philosopher.

The term “economist” wasn’t in use in 1776, when Smith completed his magnum opus. He considered himself a scholar of human behaviour, which is what economics, broadly understood, is all about.

In Book I, Chapter II of the Wealth of Nations, Smith wrote:

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages.”

Smith’s famous words have often – perhaps willfully – been misinterpreted to mean that man is fundamentally selfish and cruel. This is far from the case.

In fact, Smith’s great insight was that people are inherently motivated to earn a profit and that specialisation, division of labour, and competition in a free market are the most powerful forces for wealth creation in a society.

When people separately pursue their own interests, they create value for others which in turn leads to aggregate improvements in welfare. This produces more human flourishing than altruism (although Smith was nevertheless a strong proponent of voluntary charity).

What was true in 18th century Britain at the dawn of the industrial revolution still holds true in 21st century South Africa – except we seem to have forgotten Smith’s basic insight about human nature.

Animal spirits

Apparently, the private sector is passively sitting on mountains of cash, unwilling to invest in South Africa’s ailing economy. All that’s needed is for the government to jolt them out of their slumber and awaken their “animal spirits”.

At least that’s how the organisers of the conference saw it. Rather than Adam Smith, it was the ghost of John Maynard Keynes that was haunting the halls of the Sandton Convention Centre.

In his speech, the President boasted that R889 billion had already been “committed” for 81 projects. Seems impressive, until you realise that this figure includes R479 billion from development finance institutions, which is technically public money.

Much of the remaining R450 billion in fixed investment commitments consists of recapitalisation of existing projects. In other words, brownfield, rather than greenfield investments. While maintenance and upgrades are important, this is often reflective of the sunk costs of the initial investment.

For example, the R60 billion promised at the conference from chemicals and energy giant, Sasol, was described by its president and chief executive, Simon Baloyi, as “sustenance capital”:

“It’s the money that we’re going to spend in the next three years to ensure that we can continue with our operation,” Baloyi said. “As a company, we have a choice. If the legislative environment is not supportive of business, you cannot almost waste the investors’ money,” he added.

Mr Baloyi is quite right. He has a responsibility to Sasol’s shareholders, lenders and employees to make judicious investments that will generate a return. If the policy environment is not conducive, then it would be irresponsible of him to invest when the conditions are not right.

It’s all very good and well for the President to urge private companies to just invest already, but he won’t experience the downside if these investments fail. Those staking their capital are the ones carrying the risk.

Capitalism is not only about profit, but also loss. Failure is part of the discovery process. When an investment fails it serves as a useful signal to other entrepreneurs in the market to stop that activity and find better ways for their time, energy and capital to be spent.

By contrast, when government investments fail, they tend to keep failing – for a long time.

Show me the money

What South Africa really needs is large allocations of private capital, not state infrastructure projects or make-work schemes funded by taxpayers. And these investments must have a reasonable chance of making a lot of money for those bold enough to invest.

To achieve this, investors need to be sure that their private property rights will be respected, that their assets will be secure, and that their business will not be subject to capricious or pernicious regulation.

At the conference, President Ramaphosa renewed his recent promise to review Black Economic Empowerment (BEE), but he reiterated his commitment to the policy in principle, despite its staggering compliance costs.

His government’s insistence on paying less than market-related compensation for property expropriated by the state will not be comforting to investors either.

Nothing to be ashamed of

Conferences like these tend to be dominated by talk of “corporate social responsibility”, “sustainability,” “transformation,” and the “triple bottom line”.

These concepts have a high moral valence, but they mask a more sinister agenda: regulatory and political control over the productive economy by politicians and bureaucrats.

Corporate South Africa often speaks about “giving back”. This phrasing implies that they have somehow “taken away”. Why does business insist on atoning for sins that it has not committed?

Rather, right-thinking businesses should be proudly boasting of the value they generate for customers, the returns they earn for shareholders, and their enormous contribution to the fiscus (although they should insist that government consumes less and cuts taxes).

In the context of the South African state’s chronic incapacity, the private sector also plays an essential role in providing “public goods” like education, healthcare, and security.

The one thing

You don’t need to read a thousand pages of the Wealth of Nations – although you probably should – to know that investors are motivated by one thing and one thing only: the ability to make a profit.

South Africa is not special. The world doesn’t owe us anything. We must compete or be left behind.

Until that penny drops South Africa will remain an unattractive investment destination.

Ansara is CEO of the Free Market Foundation.