[Letter] Politics behind BAT plant closure

This case illustrates how a state’s weak capacity and poor policy enforcement harm businesses as much as overtly hostile regulations. The ineffectiveness of enforcement against illicit tobacco reflects sustained governance failures in institutions, including revenue collection, customs, policing and the criminal justice system.

In the past, political risk was just major shocks from government decisions, such as a dictator seizing assets or overregulation by a vindictive ruling regime. But now, though the government remains the main arbiter it is no longer the sole actor. Political risk is the probability that a political action could affect a business’s operations. Political action is the implementation and the lack of implementation of policy and legislation, but also the consequences of nonstate actors.

Thus, businesses that conflate political stability with policy reliability leave themselves open to blind spots of dangerous, but predictable, risks. South Africa is unlikely to experience macro-political upheaval, but poor policy implementation (never mind the implementation of antibusiness and antigrowth policy itself) continues to deteriorate in ways that harm businesses.

“With about 75% of the South African cigarette market now estimated to be illicit, continued local manufacturing has become unviable,” said Johnny Moloto, head of corporate & regulatory affairs at BAT Sub-Saharan Africa. This stems from years of inconsistent enforcement, politically contested tax policies and misalignment between the Treasury, law enforcement and political leadership.

This multi-actor risk environment is what traditional compliance and legal frameworks struggle to capture, but political risk frameworks successfully address. Despite South Africa being a politically stable and business friendly environment, the actions of those outside the government, enabled by the inactions of the government, pose a serious threat.

When a large, regulated multinational exits local manufacturing while explicitly citing illicit trade and governance failure, it sends a negative signal to other investors about the state’s ability to uphold the rules of the game. BAT’s manufacturing exit presents itself as a second-order political risk for South Africa.

Article originally appeared here.