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South Africa: 2008 INVESTMENT CLIMATE STATEMENT - SOUTH AFRICA

     
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Reference ID: 08PRETORIA77
Created: 2008-01-15 08:08
Released: 2011-08-30 01:44
Classification: UNCLASSIFIED
Origin: Embassy Pretoria

VZCZCXRO2103
RR RUEHDU RUEHJO
DE RUEHSA #0077/01 0150808
ZNR UUUUU ZZH
R 150808Z JAN 08
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 3143
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPARTMENT OF TREASURY WASHDC
RUCPCIM/CIMS NTDB WASHDC
RUEHJO/AMCONSUL JOHANNESBURG 7822
RUEHTN/AMCONSUL CAPE TOWN 5220
RUEHDU/AMCONSUL DURBAN 9490

UNCLAS SECTION 01 OF 11 PRETORIA 000077
 
SIPDIS
 
DEPT FOR EB/IFD/OIA;
USTR FOR COLEMAN
 
SIPDIS
 
E.O. 12958: N/A
TAGS: ECON EFIN EINV ETRD ELAB PGOV OPIC KTDB USTR SF
 
SUBJECT: 2008 INVESTMENT CLIMATE STATEMENT - SOUTH AFRICA
 
REF:  07 State 158802
 
1. (U) In response to Ref A, this cable presents post's 2008
Investment Climate Statement for South Africa. This is also Chapter
6 of the 2008 Country Commercial Guide for South Africa.
 
2. (U) BEGIN TEXT
 
Chapter 6 Investment Climate Statement FY 2008
 
6.1 Openness to Foreign Investment
The government of South Africa is open to foreign investment, which
it views as a means to drive growth, improve international
competitiveness, and obtain access to foreign markets. Virtually all
business sectors are open to foreign investors. No government
approval is required, and there are almost no restrictions on the
form or extent of foreign investment. Trade and Investment South
Africa (TISA), a division of the Department of Trade and Industry
(DTI), provides assistance to foreign investors. The agency
concentrates on sectors in which research has indicated that the
country has a comparative advantage. TISA offers information on
sectors and industries, consultation on the regulatory environment,
facilitation for investment missions, links to joint venture
partners, information on incentive packages, assistance with work
permits, and logistical support for relocation. DTI publishes the
"Investor's Handbook" on its website: http://www.thedti.gov.za/ (see
"publications").
Over the past decade, macroeconomic management has been strong,
resulting in a strengthened rand and a consistently positive rate of
economic growth. Since 1994, the government has sought to liberalize
trade and enhance international competitiveness by lowering tariffs,
abolishing most import controls, undertaking some privatization, and
reforming the regulatory environment. While this has resulted in
several large acquisitions in banking, telecommunications, tourism,
and other sectors, foreign direct investment has fallen short of the
government's expectations. In January 2005, Moody's assigned South
Africa a sovereign debt rating of Baa1, three steps into investment
grade, and raised the outlook from stable to positive in June 2007.
Standard and Poor's and Fitch also rank South Africa at investment
grade.
To alleviate high unemployment (25.5 percent as of March 2007), the
government has focused on quickening the pace of economic growth and
job creation. Given steady domestic investment and the relative lack
of foreign direct investment, the government is convinced that the
public sector must take the lead by investing in the nation's
inadequate infrastructure. Under the government's new Accelerated
and Shared Growth Initiative of South Africa (ASGISA), unveiled in
2006, state-owned enterprises plan to invest more than $50 billion
over the next four years, mainly on transportation infrastructure,
telecommunication networks, and energy. Other key elements of ASGISA
include labor market reform, improved delivery of public services,
skills development, a revamped industrial policy, and support to
small business.
In August 2007, the DTI launched its National Industrial Policy
Framework, and accompanying Industrial Policy Action Plan, to
promote a more labor-absorbing and broader-based industrialization
path in four lead sectors: capital or transport equipment;
automotive; chemical, plastic fabrication and pharmaceuticals; and
forestry, paper and furniture. Business process outsourcing,
clothing and textiles, tourism, and biofuels were also identified
Qclothing and textiles, tourism, and biofuels were also identified
for immediate attention. The Policy Framework anticipates
initiatives in the form of tariff reductions, increased industrial
financing, and additional incentives for investors.
A 2005 survey of South African businesses sponsored by the World
Bank and DTI queried domestic and foreign firms about South Africa's
investment climate. Constraints most often mentioned were the lack
of skilled labor, the strong rand limiting exports, labor relations,
and crime. A 2005 survey conducted by the American Chamber of
Commerce in South Africa reinforced these views.
In January 2004, President Mbeki signed the Broad-Based Black
Economic Empowerment Act of 2003, the legislation enacting the Black
Economic Empowerment (BEE) strategy, a program to increase the
participation in the economy of historically disadvantaged South
Africans. The Act directed the Minister of Trade and Industry to
develop a national strategy for BEE, issue implementing guidelines
in the form of Codes of Good Practice, encourage the development of
industry-specific BEE charters, and establish a National BEE
Advisory Council to review progress on BEE targets. While firms are
not legally required to meet BEE criteria, they are less competitive
for government tenders if they do not.
On December 6, 2006 cabinet approved Codes of Good Practice
specifying BEE requirements. These codes deal with employment
equity, skills development, enterprise development, preferential
 
PRETORIA 00000077  002 OF 011
 
 
procurement, and small and medium-sized enterprises. They also
permit multinational corporations to score equity ownership "points"
through the use of mechanisms not involving the transfer of equity
if these mechanisms are approved by DTI and the multinationals have
a global corporate policy of owning 100 percent of the equity in
their subsidiaries. The American Chamber of Commerce and many
individual U.S. companies had pressed for the right to use such
"equity equivalent" mechanisms. These Codes were published in the
Government Gazette in February 2007.
A firm's BEE "score" will be considered by government departments
when awarding contracts. The BEE Codes of Good Practice and other
pertinent BEE legislation may be found on DTI's website:
http://www.thedti.gov.za/.
Following national elections in April 2004, the government unveiled
plans to restructure most of the remaining state-owned enterprises
rather than proceed with plans for privatization. Transnet
(transportation) is focusing on core sectors that support its
freight transport and logistic business. Assets or businesses that
are not part of this strategy are in the process of being sold to
the private sector or being transferred back to the government. SA
Express, Transnet's remaining aviation interest, will be transferred
to the Department of Pubic Enterprises, Transtel Telecom was sold to
Neotel, and the disposal of Luxrail (The Blue Train), Autopax, a
passenger bus operation, and the IT service subsidiary arivia.kom
are underway. The Department of Minerals and Energy (DME) has
tendered and awarded a preferred bidder status to AES for a 1000 MW
power project. Other opportunities for private investment in the
power sector are likely to follow with the DME's announced policy to
grant up to 30 percent of new energy projects to the private sector.
The planned privatization of smaller parastatals, such as Safcol
(forestry) and, in the case of Denel (Defense), with partial buy-ins
by foreign suitors of Denel subsidiaries, also afforded
opportunities for foreign investment.
6.2 Conversion and Transfer Policies
The Exchange Control Department at the South African Reserve Bank
(SARB) administers foreign exchange policy. An authorized foreign
exchange dealer, normally one of the large commercial banks, must
handle international commercial transactions and report every
purchase of foreign exchange, irrespective of the amount, that is
received by South African residents or companies. As a rule, there
are only limited delays in the conversion and transfer of funds.
Non-residents may freely transfer capital into and out of South
Africa, although transactions must be reported to authorities.
Non-residents may purchase local securities without restriction. To
facilitate repatriation of capital and profits, foreign investors
should make sure that an authorized dealer endorses their share
certificates as "non-resident."  Foreign investors should also be
sure to maintain an accurate record of investment.
South African subsidiaries and branches of foreign companies are
considered to be South African residents, and, are subject to
exchange control by the SARB. South African companies may, as a
general rule, freely remit the following to non-residents:
repayment of capital investments; dividends and branch profits
(provided such transfers are made out of trading profits and are
Q(provided such transfers are made out of trading profits and are
financed without resorting to excessive local borrowing); interest
payments (provided the rate is reasonable); and payment of royalties
or similar fees for the use of know-how, patents, designs,
trademarks or similar property (subject to prior approval of SARB
authorities).
Since 2004, South African companies may invest in other countries
without restriction (although SARB approval/notification is still
required) and South African individuals may freely invest in foreign
firms listed on South African stock exchanges. Individual South
African taxpayers in good standing may invest up to R750,000 in
total (approximately $107,000) in other countries. In October 2005,
the government announced that South African banks would be able to
commit up to 40 percent of their domestic capital in other
countries, but only 20 percent outside Africa. In addition, mutual
and other investment funds may now invest up to 25 percent of their
retail assets in other countries. Pension plans and insurance funds
may invest 15 percent of their retail assets in other countries.
Before accepting or repaying a foreign loan, South African residents
must obtain SARB approval. The SARB must also approve the payment of
royalties and license fees to non-residents when no local
manufacturing is involved. When local manufacturing is involved, the
DTI must approve the payment of royalties related to patents on
manufacturing processes and products. Upon proof of invoice, South
African companies may pay fees for foreign management and other
services provided such fees are not calculated as a percentage of
sales, profits, purchases, or income.
SARB approval is also required for the sale of all forms of South
African-owned intellectual property rights (IPR). Approval is
generally granted by SARB if the transaction occurs at arms length
 
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and at fair market value. IPR owned by non-residents is not subject
to any restrictions in terms of repatriation of profits, royalties,
or proceeds from sales.
Further questions on exchange control may be addressed to:
South African Reserve Bank
Exchange Control Department
P.O. Box 427, Pretoria, 0001
Tel: +27 (0) 12 313-3911; Fax: +27 (0) 12 313-3197
Website: http://www.reservebank.co.za/
6.3 Expropriation and Compensation
Under the Expropriation Act of 1975 and the Expropriation Act
Amendment of 1992, the government is entitled to expropriate private
property for reasons of public necessity or utility. The decision is
an administrative one. Compensation should be the price that the
property would have realized in an open market transaction. There is
no record, dating back to 1924, of an expropriation or
nationalization of a U.S. investment in South Africa.
Racially discriminatory property laws during apartheid resulted in
highly disproportionate patterns of land ownership in South Africa.
As a result, the post-apartheid government has committed to
redistributing 30 percent of the country's farm land to black South
Africans by 2014. As of 2006, only 4.1 percent of total farm land
had been redistributed under the government's land reform program.
The government employs market-based land reform, but wants to speed
redistribution. In 2005, the government indicated that it was
willing to use more proactive land acquisition strategies to
accelerate redistribution. In several restitution cases, the
government has initiated proceedings to expropriate white-owned
farms after courts ruled that the land had been seized from blacks
during apartheid and the owners subsequently refused court-approved
purchase prices. In most of these cases, the government and owners
have reached agreement prior to any final expropriation actions.
However, in March 2007, the government took possession of a farm in
Northern Cape Province after negotiations collapsed. As required by
South African law, the government paid the previous owners the fair
market value for the land, which had been established by independent
auditors. This marked the first time the government has exercised
its expropriation power in a restitution or redistribution case.
6.4 Dispute Settlement
South Africa is a member of the New York Convention of 1958 on the
recognition and enforcement of foreign arbitration awards, but is
not a member of the World Bank's International Center for the
Settlement of Investment Disputes. South Africa recognizes the
International Chamber of Commerce, which supervises the resolution
of transnational disputes. South Africa applies its commercial and
bankruptcy laws with consistency and has an independent, objective
court system for enforcing property and contractual rights.
6.5 Performance Requirements and Incentives
DTI offers six investment incentives for manufacturing. Foreign
Investment Grants may provide up to 15 percent of the value of new
machinery and equipment to a maximum of R3 million (approximately
$430,000) per entity for relocation to South Africa. Industrial
Development Zones provide duty-free import of production-related
materials and zero VAT on materials sourced from South Africa, along
with the right to sell into South Africa upon payment of normal
import duties on finished goods. The Skills Support Program provides
Qimport duties on finished goods. The Skills Support Program provides
up to 50 percent of training costs and 30 percent of worker salaries
for a maximum of three years to encourage the development of
advanced skills. The Strategic Investment Project program offers a
tax allowance of up to 100 percent (a maximum allowance of R600
million (approximately $86 million) per project) on the cost of
buildings, plant and machinery, for strategic investments of at
least R500 million (approximately $70 million). The Critical
Infrastructure Facility supplements funds up to 30 percent of the
development costs of qualifying infrastructure projects. The Small
and Medium Enterprise Development Program offers a tax free grant of
up to R3.05 million (approximately $435,000) to manufacturers with
assets of less than R100 million (approximately $14 million) for a
maximum of three years. The first two years of the grant is based on
the investment in operating assets and the third year on the level
of employment generated.
In July 2004, DTI announced an incentive to encourage investment,
both foreign and domestic, in the local film industry. It
established the Film and Television Production Rebate Scheme that
allows eligible applicants to receive a rebate of 15 percent of the
production expenditures for foreign productions and up to 25 percent
for qualifying South African productions. Film projects must have
begun after April 1, 2004 and must reach a threshold of R25 million
(approximate $3.6 million) to qualify for the rebate. Other
requirements include 50 percent completion of the principal
photography in South Africa and a minimum of four weeks photography
time. Eligible productions include movies, tele-movies, television
series, and documentaries. The maximum rebate for any project will
 
PRETORIA 00000077  004 OF 011
 
 
be R10 million (approximate $1.4 million). Details on the entire
program are available at the DTI website at http://www.dti.gov.za/.
 
To encourage investors to establish or relocate industry to areas
throughout South Africa, the country's various provinces have
development agencies that offer incentives. These vary from province
to province and may include reduced interest rates, reduced costs
for leasing land and buildings, cash grants for the relocation of
plant and employees, reduced rates for basic facilities, railage and
other transport rebates, and assistance in the provision of housing.
 
The Industrial Development Corporation, a self-financing,
state-owned development finance institution that reports to DTI,
provides equity and loan financing to support investment in target
sectors. It also provides credit facilities for South African
exporters. Several government-supported bodies provide technical
assistance to industry. The Council for Scientific and Industrial
Research provides multi-disciplinary research and development for
industrial application.
Technifin is a government-owned corporation which finances the
commercialization of new technology and products. MINTEK develops
mining and mineral processing technology for company application.
The Council for Geoscience undertakes geological surveys and
services related to minerals exploration.
Under the National Industrial Participation Program (NIPP), foreign
companies winning large government tenders exceeding $10 million
must invest at least 30 percent of the value of the imported content
of the tender in South Africa.
The government initiated the Motor Industry Development Program
(MIDP) in 1995 to restructure the South African automotive industry
over a period of twelve years. The program was designed to encourage
local manufacturing by means of a duty rebate scheme on imported
vehicles and component parts, to be phased out over the life of the
program. In 2002, the Minister of Trade and Industry extended the
program from 2007 to 2012. Import duties and duty rebates will
continue to decline over this extended period. The import duty on
built-up light vehicles will fall to 25 percent and the import duty
on original equipment components will fall to 20 percent by 2012.
The DTI has indicated that the MIDP would be sustained beyond 2012.
 
In August 2007, the government launched its National Industrial
Policy Framework with an accompanying Action Plan. As noted above in
Section 6.1, the Policy Framework provides for import tariff
reductions, tighter competition legislation, increased industrial
financing, and an improved incentive scheme for investors in
specific industrial sectors.
6.6 Right to Private Ownership and Establishment
The right to private property is protected under South African law.
All foreign and domestic private entities may freely establish,
acquire, and dispose of commercial interests. The securities
regulation code requires that an offer to minority shareholders be
made when 30 percent shareholding has been acquired in a public
company that has at least 10 shareholders and net equity in excess
of R5 million.
State-owned enterprises dominate a number of key sectors in South
Africa. Eskom supplies 94 percent of South Africa's electricity.
Transnet operates the bulk of the nation's railways and ports. The
South African Post Office is a legislated monopoly. Telkom, 37
QSouth African Post Office is a legislated monopoly. Telkom, 37
percent-owned by government, is the dominant fixed-line telephone
operator. A second national operator, Neotel, began limited
business-only operations in October 2006 and is 30 percent
government owned. Neotel entered the business-to-business market in
2007 and plans to enter the residential market. InfraCo, a 100
percent government-owned broadband provider, was formed using the
fibreoptic networks of Eskom and Transnet in December 2006 and
approved for operations by Parliament in October 2007.
The Competition Act of 1998 and subsequent amendments address
anticompetitive practices in both the private and public sectors.
The Competition Commission has demonstrated increasing capacity to
implement competition policy effectively. There have been more
frequent challenges in recent years against state-owned enterprises
that compete unfairly or otherwise abuse their dominant position.
6.7 Protection of Property Rights
The South African legal system protects and facilitates the
acquisition and disposition of all property rights, e.g., land,
buildings, and mortgages. Deeds must be registered at the Deeds
Office. Banks usually provide finance for the purchase of property
by registering the mortgage as security.
Owners of patents and trademarks may license them locally, but when
a patent license entails the payment of royalties to a non-resident
licensor, DTI must approve the royalty agreement. Patents are
granted for twenty years - usually with no option to renew.
Trademarks are valid for an initial period of ten years and
 
PRETORIA 00000077  005 OF 011
 
 
thereafter renewable for ten-year periods. The holder of a patent or
trademark must pay an annual fee to preserve ownership rights. All
agreements relating to payment for the right to use know-how,
patents, trademarks, copyrights, or other similar property are
subject to approval by exchange control authorities in the South
African Reserve Bank. For consumer goods, a royalty of up to four
percent of the factory selling price is the standard approval. For
intermediate and finished capital goods, a royalty of up to six
percent will be approved.
Literary, musical, and artistic works, as well as cinematographic
films and sound recordings are eligible for copyright under the
Copyright Act of 1978. New designs may be registered under the
Designs Act of 1967, which grants copyrights for five years.
The Counterfeit Goods Act of 1997 provides additional protection to
owners of trademarks, copyrights, and certain marks under the
Merchandise Marks Act of 1941. The Intellectual Property Laws
Amendment Act of 1997 amended the Merchandise Marks Act of 1941, the
Performers' Protection Act of 1967, the Patents Act of 1978, the
Copyright Act of 1978, the Trademarks Act of 1993, and the Designs
Act of 1993 to bring South African intellectual property legislation
fully into line with the WTO's Trade-Related Aspects of Intellectual
Property Rights Agreement. Amendments to the Patents Act of 1978
were also intended to bring South Africa into line with TRIPS, to
which South Africa became a party in 1999, and provides for the
implementation of the Patent Cooperation Treaty.
The International Intellectual Property Alliance reported an
increase in border seizures of pirated goods, as well as increased
police raids in the optical disc market during 2005 and 2006. A
local watchdog, the South African Federation Against Copyright Theft
reported on its website (http://www.safact.co.za/) statistics on
seizures of counterfeit DVDs as well as a growing number of
successful criminal cases, including imposition of prison sentences,
against pirates in 2007, demonstrating the government's commitment
to IPR enforcement.
6.8 Transparency of the Regulatory System
In general, the Companies Act of 1973 provides for transparent
regulations concerning the establishment and operation of
businesses. Under the Act, for-profit businesses employing more than
20 persons must register as a company within 21 days. The same rules
apply to foreign companies, with the exception that foreign
companies may elect to operate as an "external company" (with no
limit on legal liabilities). In general, businesses must also
register with the local Regional Services Council, the Department of
Labor, the Workman's Compensation Commissioner, the appropriate
industry council, and the South African Revenue Service. In
addition, all businesses must obtain an operating license from local
authorities. The validity of an operating license is indefinite
unless a business is sold or relocated. Forms to be filled out by
investors are straightforward. The process takes six months on
average, but can be done in one month through Trade and Investment
South Africa, a division of DTI.
Virtually all business activities are open to foreign investors. The
government does not prohibit or officially discourage a
foreign-owned business from locating in a particular region of the
Qforeign-owned business from locating in a particular region of the
country. Restrictions that apply to a particular industry apply to
both domestic and international investors. Exceptions exist in the
areas of banking and defense. For example, a branch of a foreign
bank may be required to employ a certain number of South Africans
and maintain a minimum local capital base to obtain a banking
license. In addition, a foreign company must register as an external
company before immovable property can be registered in their names.
 
6.9 Efficient Capital Markets and Portfolio Investment
South Africa's banks are well-capitalized and comply with
international banking standards. Six of the 35 banks in South Africa
are foreign-owned and 15 are branches of foreign banks. The "Big
Four" (Standard, ABSA, First Rand, and Nedcor) dominate the sector,
accounting for almost 85 percent of the country's banking assets,
which total over $240 billion. In 2005, the government approved
Barclays' acquisition of ABSA. As of early 2008, Standard is
awaiting government approval of the sale of 20 percent of its equity
to the International Commercial Bank of China.
The South African Reserve Bank (SARB) regulates the sector according
to the Bank Act of 1990. There are three alternatives for foreign
banks to establish local operations, all of which require SARB
approval: 1) a separate company; 2) a branch; or 3) a representative
office. The criteria for the registration of a bank are the same as
for domestic banks. Foreign banks, however, must include additional
information, such as holding company approval, a letter of "comfort
and understanding" from the holding company, and a letter of no
objection from the foreign bank's home regulatory authority. More
information on the banking industry may be obtained from the South
African Banking Association at the following website:
 
PRETORIA 00000077  006 OF 011
 
 
http://www.banking.org.za/.
The Financial Services Board (FSB) governs South Africa's non-bank
financial services industry (see website: http://www.fsb.co.za/).
The FSB regulates insurance companies, pension funds, unit trusts
(i.e., mutual funds), participation bond schemes, portfolio
management, and the financial markets. The JSE Securities Exchange
SA (JSE) is the nineteenth largest exchange measured by market
capitalization in the world. As of December 2007, market
capitalization stood at $842 billion with a total of 456 firms
listed. The Bond Exchange of South Africa (BESA) is licensed under
the Financial Markets Control Act. Membership includes banks,
insurers, investors, stockbrokers, and independent intermediaries.
The exchange consists principally of bonds issued by government,
state-owned enterprises, and private corporations. More information
on financial markets may be obtained from the JSE (website:
http://www.jse.co.za)and/ the Bond Exchange (website:
http://www.bondexchange.co.za/).
Foreign investors deemed "affected persons" must obtain SARB
approval to borrow amounts greater than R20,000 (approximate
$2,900). "Affected persons" are defined as companies or other bodies
in which: 1) 75 percent or more of the capital assets or earnings
may be used for payment to, or for the benefit of, a non-resident;
or 2) 75 percent or more of the voting securities, voting power,
power of control, capital, assets or earnings are vested in, or
controlled by, any non-resident. No person in South Africa may
provide credit to a non-resident or "affected person" without an
exchange control exemption. Non-residents and "affected persons,"
however, may borrow up to 100 percent of the South African Rand
value of funds introduced from abroad and invested locally.
Additionally, the ability to borrow locally increases if both
residents and non-residents own the local enterprise.
6.10 Political Violence
Political violence is no longer a serious issue in South Africa, but
criminal violence remains high. National and provincial governments
have pursued a number of programs in an attempt to control or
stabilize the level of criminal violence.
6.11 Corruption
South African law provides for prosecution of government officials
who solicit or accept bribes. Penalties for offering or accepting
bribes include criminal prosecution, fines, dismissal (for
government employees), and deportation (for foreign citizens). The
South African Prevention and Combating of Corrupt Activities Act of
2004 clarified what should be considered as corruption and allows
for the investigation and seizure of "unexplained wealth." The act
also obliges public officials to report corrupt activities,
prescribes strict penalties, including the possibility of life
imprisonment, and tasks the National Treasury to create a register
of corrupt individuals and firms that will not be allowed to submit
bids on government tenders. One shortcoming of the Act is the lack
of provision of protection for whistleblowers.
New laws, such as the Promotion of Access to Information Act signed
into law in February 2000, have helped to increase transparency in
government in the last few years. The Public Finance Management Act,
which became effective on April 1, 2000, has helped to raise the
level of oversight and control over public funds and improved the
transparency of government spending, especially with regard to
Qtransparency of government spending, especially with regard to
off-budget agencies and parastatals.
At least ten agencies are engaged in fighting corruption. Some, like
the Public Service Commission (PSC), Office of the Public Protector
and Office of the Auditor-General, are constitutionally mandated.
The South African Police Anti-Corruption Unit and the National
Prosecuting Authority's Directorate for Special Operations
(popularly known as the Scorpions) have dedicated units to combat
corruption. The Special Investigating Unit (SIU) under the
Presidency investigates corruption in government departments and in
the process has recently identified hundreds of civil servants
alleged to have improperly received state housing subsidies. The SAG
took administrative action to recover these subsidies.
According to Transparency International's 2007 Corruption
Perceptions Index, the perception of corruption in South Africa
substantially improved, although the public perception of widespread
official corruption, particularly in the police and the Department
of Home Affairs, continued. South Africa 2007 Index ranking was 43
out of 179 countries and was the second least corrupt in Africa.
South Africa is not a signatory of the OECD Convention on Combating
Bribery, but is a signatory of the UN Convention against Corruption.
Transparency International maintains an office in South Africa.
6.12 Bilateral Investment Agreements
South Africa has bilateral investment agreements with Argentina,
Austria, Belgium, Canada, Chile, the Czech Republic, Finland,
France, Germany, Greece, Mauritius, the Netherlands, the Republic of
Korea, Spain, Sweden, Switzerland, Turkey, and the United Kingdom. A
Trade, Development, and Cooperation Agreement went into force
 
PRETORIA 00000077  007 OF 011
 
 
between South Africa and the European Union on January 1, 2000, but
it does not contain an investment chapter. South Africa, as part of
SACU, is currently in negotiations for trade agreements with
Mercosur and India.
The United States began free trade agreement (FTA) negotiations with
the five Southern African Customs Union (SACU) countries (including
South Africa, Botswana, Lesotho, Namibia, and Swaziland) in June
2003, but active negotiations were ended in April 2006. In lieu of a
U.S.-SACU FTA, the United States and SACU agreed to negotiate a new
type of agreement (called a Trade Investment and Development
Cooperation Agreement or "TIDCA"). An agenda for the U.S.-SACU TIDCA
will be defined in 2008.
Agreements regarding mutual assistance between the customs
administrations of the United States and South Africa became
effective on August 1, 2001. The U.S.-South Africa bilateral tax
treaty eliminating double-taxation became effective on January 1,
1998.
6.13 OPIC and Other Investment Insurance Programs
In 1993, South Africa signed an investment incentive agreement with
the United States to facilitate Overseas Private Investment
Corporation (OPIC) programs. To date, OPIC has invested in a number
of investment funds supporting sub-Saharan Africa development,
including the Africa Growth Fund ($25 million), the Modern Africa
Growth and Investment Fund ($105 million), and the ZM Investment
Fund ($120 million). OPIC also established the $350 million
Sub-Saharan Africa Infrastructure Fund (SAIF), which intends to fund
infrastructure projects in sub-Saharan Africa. OPIC helped the
National Urban Reconstruction and Housing Agency (NURCHA) to
establish a $31 million scheme to lend to small contractors for the
construction of affordable houses. In 2004, OPIC entered into an
agreement with the Homeloan Guarantee Company (HLGC) to fund
low-income home loans for HIV-positive South Africans. The pilot
program for this project was initiated in 2005. Net proceeds from a
$300 million investment pool will be used to purchase medication for
HIV-positive South African homeowners holding HLGC guaranteed
mortgages. Additional information on OPIC programs that involve
South Africa may be found on OPIC's website: http://www.opic.gov/.
South Africa is also a member of the World Bank's Multilateral
Investment Guarantee Agency.
6.14 Labor
The right to strike is protected under South African labor law.
Labor militancy rose sharply in 2007, with over 12.6 million
workdays lost to strikes over the first nine months of 2007, as
inflation accelerated to 7 percent, and food price inflation hit
11.3 percent in August 2007. By comparison, only 2.9 million
workdays were lost to strikes for all of 2006. As of March 2007,
total trade union membership was approximately three million
persons, or roughly 30 percent of the economically active population
employed in the formal sector. Most union members belong to
affiliates of the three major union federations: the Congress of
South African Trade Unions (COSATU), the Federation of Unions of
South Africa (FEDUSA), or the National Council of Trade Unions
(NACTU). Although COSATU, the largest of the federations, is allied
with the African National Congress (ANC) and the South African
Communist Party (SACP), it has opposed President Mbeki's policies on
issues of economic and health policy. COSATU is also opposed to
Qissues of economic and health policy. COSATU is also opposed to
efforts to privatize government services and state-owned
corporations.
According to the March 2007 Labor Force Survey (LFS), the official
unemployment rate was 25.5 percent. This rate uses the International
Labor Organization (ILO) definition of unemployment, which excludes
persons who have not actively sought employment during the previous
four weeks. To help counter unemployment and contribute to economic
growth, the government has shifted substantial resources to skills
development, and undertaken a growth and employment policy.
South Africa has no country-wide minimum wage, but the Minister of
Labor has issued determinations that set a minimum wage for certain
occupations where collective bargaining is not common. These include
domestic workers, farm workers, taxi-drivers, and retail employees.
In addition, the Minister can apply collective bargaining agreements
to firms that did not participate in negotiations.
Since 1994, the government has systemically sought to remove all
vestiges of apartheid labor legislation. In its place, the
government has sought to install a labor market characterized by
employment security, reasonable wages, and decent working
conditions. Under the aegis of the National Economic Development and
Labor Council (NEDLAC), government, business, and organized labor
negotiated all labor laws, with the exception of laws pertaining to
occupational health and safety. NEDLAC negotiations placed a high
value on worker rights and collective bargaining.
Major labor legislation includes the following:
-- The Labor Relations Act, in effect since November 1996, enshrines
the right of workers to strike and of management to lock out
 
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workers. The Act created the Commission on Conciliation, Mediation,
and Arbitration (CCMA) which can conciliate, mediate, and arbitrate
in cases of labor dispute, and is required to certify an impasse in
bargaining council negotiation before a strike can be legally
called. The CCMA enjoys substantial popularity among workers and has
a caseload in excess of what was anticipated.
-- The Basic Conditions of Employment Act, implemented in December
1998, establishes a 45-hour workweek as well as minimum standards
for overtime pay, annual leave, and notice of termination. It
outlaws child labor.
-- The Employment Equity Act prohibits unfair employment
discrimination and requires large and medium-sized employers to
prepare affirmative action plans to ensure that black African,
women, and disabled persons are adequately represented on the
workforce.
-- Occupational Health and Safety Act, last amended in 1993,
provides for occupational health and safety standards and gives the
Department of Labor the right to inspect the workplace. For the
mining industry, the Inspector of Mines provides regulatory
oversight under the Mine Health and Safety Act.
-- The Skills Development Act imposes a levy on employers equal to
one percent of the payroll that is to be used for training programs
devised by industry-specific training authorities. Employers who
provide job skills training can claim back much of their
contribution from government.
Companies have complained about the introduction, through a
regulation in early 2003, of a two percent training levy on the
salaries of expatriates in order to enter the country under an
expedited visa procedure. The levy does not apply to expatriates
already resident in the country or to inter-company transfers.
Expatriates who enter the country under the normal visa procedure
are exempt from the levy, but the normal process is complex and
time-consuming. The government's decision to implement the
levy-based system through regulation rather than legislation has
also been controversial. A legal challenge to the regulations
further delayed the implementation of new immigration legislation
and this created more uncertainty about the effective handling of
applications for visas.
Despite amendments to some of the above labor laws passed in 2002,
business argues that over-regulation of the labor market has
constrained employment and contributed to the rise in unemployment.
On the other side, trade unions argue that employers evade labor
legislation through the use of labor brokers who supply casual
workers. Other areas of contention revolve around the application of
wage structures to all firms in an industry, whether or not firms
participated in wage negotiations, and complex requirements and
appeal procedures for the dismissal of workers.
6.15 Foreign Trade Zones/Free Ports
South Africa designated its first Industrial Development Zone (IDZ)
in 2001. IDZs offer duty-free import of production-related materials
and zero VAT on materials sourced from South Africa, along with the
right to sell into South Africa upon payment of normal import duties
on finished goods. Expedited services and other logistical
arrangements may be provided for small to medium-sized enterprises,
or for new foreign direct investment. Co-funding for infrastructure
development is available. There are no exemptions from other laws or
Qdevelopment is available. There are no exemptions from other laws or
regulations, such as environmental and labor laws. The Manufacturing
Development Board licenses IDZ enterprises in collaboration with the
South African Revenue Service (SARS), which handles IDZ customs
matters. IDZ operators may be public, private, or a combination of
both. IDZs are currently located at Coega near Port Elizabeth, in
East London, Richards Bay, and at Johannesburg International
Airport. An IDZ in Mafikeng is expected to be approved by Cabinet in
2008.
6.16 Foreign Direct Investment Statistics
Foreign direct investment (FDI) data is readily available in South
Africa, but published statistics vary depending on their source and
definition. Among the numerous institutions that provide foreign
investment data, the U.S. Embassy in South Africa relies mostly on
the SARB. SARB statistics conform to the IMF definition of FDI
(i.e., FDI is generally defined as ownership of at least 10 percent
of the voting rights in an organization by a foreign resident or
several affiliated foreign residents, including equity capital,
reinvested earnings, and long-term loan capital) and represent
actual investment, excluding announced but not completed "intended"
investment. However, the SARB does not provide country-specific
figures that distinguish between actual investment flows and changes
in investment stocks caused by asset swaps, exchange rate
adjustments, and mergers and acquisitions. This makes it difficult
to track the United States' and other countries' FDI position in
South Africa on an annual basis.
Because SARB statistics only provide an annual total for all the
countries' flows combined, observers also often consult more updated
 
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information obtained from the South Africa-based firm "Business Map"
(BM). The latter offers fee-based services for a wide range of
investor-related data and analysis (website:
http://www.businessmap.co.za/).
The following FDI statistics were drawn from the SARB's December
2006 Quarterly Bulletin. The conversion exchange rate used was the
average exchange rate for each year cited.
Table A: Average Exchange Rates
            2002  2003  2004  2005  2006
Rand/US$   10.52  7.56  6.45  6.36  6.77
Table B: Year-end Stock of Foreign Direct Investment in South Africa
 
                 2002   2003   2004   2005   2006
Rand (billion)  255.84 303.55 355.09 489.32 611.72
US$ (billion)    24.33  40.14  55.05  76.94  90.36
Table C: Year-end Stock of South African Direct Investment Abroad
   2002   2003   2004   2005   2006
Rand (billion) 189.91 180.51 216.66 232.93 354.25
US$ (billion)   18.06  23.87  33.59  36.62  52.33
Table D: GDP (in billion rands at current prices) and year-end FDI
Stock as a percentage of GDP
  2002    2003     2004     2005      2006
GDP   1,168.7  1,260.7  1,398.6  1,541.07  1,741.06
FDI(%)  21.9     24.1     25.4      31.8      35.1
Table E: Year-end stock of FDI in South Africa by region/country
(billions)
REGION/COUNTRY   RAND  RAND    US$    US$
                     2005  2006   2005   2006
EUROPE - Total      436.3  535.6  68.6   79.1
UNITED KINGDOM      350.5  440.3  55.1   65.0
GERMANY              29.9   34.1   4.7    5.0
NETHERLANDS          14.1   22.1   2.2    3.3
SWITZERLAND          10.6   12.3   1.7    1.8
FRANCE                7.7    9.2   1.2    1.4
ITALY                 1.2    2.9   0.2    0.4
N&S AMERICA (total)  33.8   51.2   5.3    7.6
USA                  31.2   37.4   5.1    5.5
AFRICA (total)        4.0    4.1   0.6    0.6
ASIA (total)         14.3   19.8   2.3    2.9
MALAYSIA              2.4    2.4   0.4    0.4
JAPAN                 9.9   14.7   1.7    2.2
OCEANIA (total)       0.8    1.0   0.1    0.1
--------------------------------------------- --------
TOTAL               489.3  611.7  76.9   90.36
--------------------------------------------- --------
Table F: Year-end Stock of South African Direct Investment Abroad by
Region/Country (billions)
REGION/COUNTRY     RAND  RAND   US$    US$
                      2005   2006   2005   2006
EUROPE - Total       189.1  238.8   29.7   35.3
UNITED KINGDOM        70.9   79.8   11.1   11.8
LUXEMBURG             74.8  106.4   11.8   15.7
AUSTRIA               18.0   22.3    2.8    3.3
OTHER                 25.4   30.3    4.0    4.5
N&S AMERICA (total)   16.3   23.7    2.6    3.5
USA                   14.4   21.7    2.3    3.2
AFRICA (total)        19.1   59.1    3.0    8.7
ASIA (total)           1.5   25.8    0.2    3.8
OCEANIA (total)        6.8    6.8    1.1    1.0
--------------------------------------------- ---
TOTAL                232.9  354.3   36.6    52.3
--------------------------------------------- ---
Table G: Year-end Stock of FDI in South Africa by Industry Sector
(billions)
 
INDUSTRY      RAND  RAND   US$   US$
                     2005  2006  2005   2006
Agriculture,
Forestry & Fishing    0.7   0.9   0.1    0.1
Mining              168.3 250.4  26.5   37.0
Manufacturing       136.0 165.4  21.4   24.4
Construction          2.0   2.0   0.3    0.3
Trade, Catering,     14.7  16.2   2.3    2.4
QTrade, Catering,     14.7  16.2   2.3    2.4
& Accommodation
Transport, Storage,   9.4  13.8   1.5    2.0
& Communication
Finance, Insurance, 157.6  162.5  24.8  24.0
Real Estate &
Business Services
Social services       0.5   0.5   0.1    0.1
--------------------------------------------- ----------
TOTAL               489.2 611.7  77.0   90.4
--------------------------------------------- ----------
 
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Table H: FDI Flows into South Africa:
Investment by foreigners in undertakings in South Africa in which
they have at least 10 percent of the voting rights (R billions):
2001* 58.4
2002 8.0
2003 5.6
2004 5.2
2005* 42.3
2006 -3.6
*The high inflow in 2001 was due to the DeBeers/Anglo American
transaction.
*The inflow in 2005 was due to the Barclays/ABSA and
Vodafone/Vodacom transactions.
Table I: FDI Flows out of South Africa:
Investment by South Africans in undertakings abroad in which they
have at least 10 percent of the voting rights (R billions):
2001* -27.4 (inflow - decrease in investment abroad)
2002 -4.2 (inflow - decrease of investment abroad)
2003 4.3
2004 8.7
2005 5.9
2006 45.5
*2001 De Beers/Anglo American transaction resulted in the return of
capital, previously invested abroad, to South Africa.
Since 1994 many foreign firms have opened or re-opened offices in
South Africa. There are an estimated 600 American companies
(including subsidiaries, joint ventures, local partners, agents,
franchises, and representative offices) doing business in South
Africa.
Key Investment Industries in South Africa:
South Africa is largely a food self-sufficient country, with imports
of wheat, oilseeds, poultry and pork largely offset by exports of
fresh fruits, vegetables, fruit juice, and wine. The bulk of the
population's food needs are supplied locally. In certain instances,
South African food and beverage companies have become global
players, such as SAB Miller. Major international agro-processing
companies with a presence in South Africa include Unilever, Nestle,
Coca-Cola, Danone, Parmalat, Kellogg, HJ Heinz, Cadbury-Schweppes,
Virgin Cola, McCain Foods of Canada, and Pillsbury.
The chemical industry is the largest manufacturing sector in the
South African economy, accounting for five percent of GDP. The
country is a world leader in the manufacture of synthetic fuel from
coal. In addition to Sasol and PetroSA Fischer-Tropsch-based
synthetic fuel operations, four oil refineries dominate the
petroleum and petrochemical industry. The rest of the chemical
manufacturing sector consists mainly of AECI, Sentrachem, and
fertilizer plants.
The Standard, ABSA, First Rand, and Nedcor commercial banking groups
provide retail and investment banking services and dominate the
South African banking industry. The European, Malaysian, and U.S.
banks with banking licenses have so far concentrated on corporate
rather than retail banking. Foreign banks have gained market share
by offering competitive lending rates.
The South African automotive and components industry includes Ford,
General Motors, Volkswagen, Bavarian Motor Works, Daimler, Chrysler,
Nissan, and Toyota, all of which benefit from the Motor Vehicle
Development Program and have production plants in South Africa.
Table J: Top Foreign Companies Invested In South Africa
Australia - BHP Billiton
Canada - Placer Dome
Denmark - AP Moller
France - Lafarge
Germany - BMW
India - Tata
Italy - Cirio (Del Monte)
Switzerland - Movenpick Hotels
U.K. - Lonrho Plc, SA Breweries,
Anglo American, Barclays, Vodafone,
British Petroleum, Old Mutual, Virgin
U.S. - Caltex; Coca Cola; Dow Chemicals;
General Motors, Ford, Pioneer Energy, CSX, Timkin
Saudi Arabia - Oger
UAE - Victoria and Alfred Waterfront
This is an illustrative listing of companies that have invested in
QThis is an illustrative listing of companies that have invested in
excess of R1 billion in South Africa since 1994.
Other significant U.S. investors include: McDonalds, Levi Strauss,
Nike, Silicon Graphics, Microsoft, HP, Dell, Sara Lee, Caterpillar,
Goodyear, Eli Lilly, Johnson and Johnson, Proctor & Gamble, Fluor,
CitiGroup, IBM, and General Electric.
 
END TEXT
 
 
 
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